Insider Dealing

Insider dealing, also known as insider trading, occurs when individuals with access to non-public, material information about a company’s securities use that information to trade those securities for personal gain. Insider dealing is illegal in most jurisdictions and undermines market fairness by giving insiders an unfair advantage over other investors. Regulators and securities exchanges closely monitor and enforce rules against insider dealing to protect the integrity of financial markets.

How Insider Dealing Occurs

Insider dealing typically involves a person who has access to material non-public information (MNPI) using it to gain an unfair advantage in the financial markets. This can happen in various ways, including:

A corporate executive buying or selling shares based on an upcoming earnings report
An employee at an investment bank tipping a friend about an imminent merger
A consultant acting on confidential information learned while advising a client
A trader using leaked data before it becomes public to profit on price movements

Insider dealing may be direct (through personal trades) or indirect (through associates or intermediaries). Even if no trade is made, the misuse or unlawful disclosure of insider information can still constitute a regulatory breach.

Key Legal and Regulatory Frameworks

Insider dealing is prohibited in virtually all developed financial markets and is governed by strict legal frameworks, such as:

EU Market Abuse Regulation (MAR): Defines insider dealing and mandates issuers and intermediaries to prevent and detect abuse
U.S. Securities Exchange Act (Rule 10b-5): Makes it unlawful to trade on the basis of material non-public information
UK Criminal Justice Act 1993 and Financial Services Act: Outlines the criminal and civil implications of insider trading
APAC and global markets: Many jurisdictions have equivalent laws enforced by local securities regulators

Penalties for insider dealing can include hefty fines, criminal charges, imprisonment, disgorgement of profits, and reputational damage.

Red Flags and Risk Indicators

Detecting insider dealing requires vigilance, especially in environments where market-sensitive information is widely circulated. Common red flags include:

Trades placed shortly before price-sensitive announcements (earnings releases, M&A, regulatory changes)
Unusual volumes or timing of transactions inconsistent with a customer’s history
Trading by individuals who are not regular market participants but have a connection to the issuer
Sudden changes in trading strategy or asset class by an employee with access to MNPI
Use of third parties or newly opened accounts to execute trades ahead of public disclosures

Firms must monitor both employee trading and client behavior for potential links to insider information.

Surveillance and Detection Tools

Firms use various surveillance technologies to detect potential insider dealing, often integrating:

Trade surveillance platforms: Monitor order flow, execution patterns, and abnormal trading behavior
Voice and electronic communication monitoring: Analyze chat, email, and phone transcripts for discussion of non-public information
Pattern analysis and profiling: Track trades against historical behavior or known event triggers
Watchlists and restricted lists: Identify and control trading in securities linked to sensitive deals or projects
Case management systems: Automate alert review, escalation, and documentation for compliance and audit purposes

Advanced systems use AI and behavioral analytics to enhance detection and reduce false positives.

Internal Controls and Prevention Measures

To mitigate insider dealing risks, financial institutions and listed companies must implement comprehensive internal controls, such as:

Information barriers (Chinese Walls): Segregating teams or departments with access to MNPI
Employee trading policies: Requiring pre-clearance, blackout periods, and post-trade disclosure
Insider lists and disclosures: Documenting who has access to inside information at any given time
Mandatory training and certification: Educating staff on what constitutes MNPI and how to handle it
Whistleblowing channels: Providing safe mechanisms for reporting concerns or misconduct

Firms should also conduct regular audits and incident reviews to assess control effectiveness and regulatory alignment.

The Broader Impact of Insider Dealing

Insider dealing undermines market integrity, investor confidence, and fair price discovery. It erodes the level playing field essential for functioning capital markets. Regulatory bodies globally are prioritizing enforcement in this area, and whistleblower incentives—such as those provided by the U.S. SEC—have further increased detection and reporting.

In a broader context, insider dealing is often linked to: