What is Insider Trading?

When it comes to financial trading, knowledge is power. You need to understand market trends, research emerging and existing companies and possess an awareness of the economic climate. But what if you know something about particular financial products that is not public knowledge and act upon it, have you engaged in insider trading? There will always be people in the know, but do not panic yet. Insider trading is not just about what information you know; it is about how you use the information.

What is Insider Trading?

Insider trading occurs when a person, referred to as the insider, possesses inside information and uses that information to obtain or dispose of, or have another person obtain or dispose of financial products that are able to be traded on the financial market (per section 1043A of the Corporations Act 2001 (Cth)). While a definition is helpful, what does that mean? To avoid committing an offence, it is integral to understand the elements that constitute insider trading.

1. The Insider

Simply put, an insider is a person who has knowledge of non-public information relating to a publicly traded company. They are not limited to the directors, executives or senior employees of a company; an insider may be any employee or person who obtains non-public information. So the next time your friends are filling you in on the latest company scuttlebutt, bear in mind that while no one has broken the law, you may be deemed to be an insider.

2. Possessing Inside Information

The crux of the crime is knowledge. The insider must first possess inside information, which is not generally available and would have a material effect on the price or value of tradable financial products.  There are several things to note here:

• First and foremost, what constitutes information is quite broad. Generally it is characterised as material and confidential information, but can apply to matters of supposition or intention and material insufficiently certain to warrant public disclosure;
• Secondly, it does not matter if the information is false. False information can induce a material effect on the price or value of shares in the same manner as accurate information, as affirmed in Mansfield & Anor v The Queen [2012], and is not precluded from the scope of insider trading provisions; and
• Thirdly, it is only considered to be generally available if the information is readily observable, has been made known in a manner that would bring it to the attention of those typically engaged in financial trading in a reasonable period, or is inferred by observable matter or previously disclosed information.

So now you know what makes you an insider, and the type of knowledge constituting inside information – does this amount to insider trading? Which brings us back to our initial quandary – where is the line between being in the know, and engaging in insider trading?

3. Using Inside Information

In essence, insider trading is the misuse of information for personal gain, through the acquisition or disposal of financial products. If the information you possess is not publicly available and is likely to have a material effect on the value or price of shares, do not act upon, or engage others to act upon, that information when trading on the market. Up until the point at which you take action based on inside information, insider trading has not occurred.

As with any rule, there are exceptions. An insider may trade in certain circumstances where the inside knowledge they possess is clearly not a factor in their decision to trade. This usually occurs where the trade is a by-product of a pre-existing contract or instruction made in good faith. Furthermore, an insider will not be liable for insider trading if they wait until the information has been disclosed to trade.

Key Takeaways

Financial trading should be free, fair and equitable for all those who participate in the market. Being in the know is not in itself a crime, however using that knowledge to leverage an unfair advantage will amount to insider trading. If you have any questions about insider trading, get in touch with our business lawyers.