Insider Trading Key Points
- Insider trading refers to the buying or selling of a company’s stocks or other securities by individuals with access to non-public, material information about the company.
- While insider trading is typically associated with illegal activity, it can be legal if the trades are disclosed in accordance with securities laws and regulations.
- In the crypto and blockchain sphere, insider trading can occur if individuals with access to non-public information about a crypto project or blockchain company use that information to trade its tokens or coins.
- Illegal insider trading can undermine trust in the markets and disadvantage other investors who do not have access to the same information.
Insider Trading Definition
Insider trading is the practice of purchasing or selling a company’s stocks or other securities by individuals who have access to non-public, material information about the company. In the context of cryptocurrencies and blockchain technology, insider trading refers to the buying or selling of a coin or token based on undisclosed, critical information about a blockchain project or company.
What is Insider Trading?
Insider trading is a term that often refers to illicit conduct, but it can also refer to legal trading by insiders.
The illegal version of insider trading is the buying or selling of securities based on material, non-public information.
This is problematic as it gives insiders an unfair advantage over other investors in the market.
In the legal version of insider trading, corporate insiders—officers, directors, and employees—buy and sell stock in their own companies, but they disclose their trades to the Securities and Exchange Commission (SEC).
Who Engages in Insider Trading?
Insiders such as corporate executives, employees, major shareholders, or anyone with access to key confidential information about a company, can potentially engage in insider trading.
In the crypto space, this could be project developers, employees of cryptocurrency exchanges, or even major community members who have access to non-public, significant information.
When Does Insider Trading Occur?
Insider trading generally occurs when someone has access to non-public, material information about a company and uses that information to trade the company’s securities.
This can happen at any time but is especially prevalent during significant company events, such as before mergers and acquisitions, earnings reports, or major regulatory changes.
Where Does Insider Trading Happen?
Insider trading can occur in any marketplace where securities, including stocks and cryptocurrencies, are traded.
This includes traditional stock exchanges, over-the-counter markets, and cryptocurrency exchanges.
Why is Insider Trading Significant?
Insider trading is significant because it undermines trust in financial markets.
It gives an unfair advantage to individuals who have access to non-public information, and it can disadvantage other investors who are trading based on public information.
In the crypto space, trust and transparency are especially important, and insider trading can severely damage the reputation of a project or exchange.
How is Insider Trading Detected and Prevented?
Regulators like the SEC use complex algorithms and surveillance techniques to detect abnormal trading patterns that could indicate insider trading.
Companies and crypto projects can also put in place policies to prevent insider trading, such as requiring a cooling-off period before insiders can trade based on new information.
Whistleblower programs can also help to detect and deter insider trading.
