What is insider trading?

Financial markets rely on two key principles: equal access to information for investors and fair price discovery. But what happens when someone uses privileged information to get ahead? It means anticipating price movements and securing near risk-free gains. High-profile cases of insider trading frequently grab headlines worldwide. With the rise of cryptocurrencies, this issue has taken on new dimensions. This guide explains the mechanisms of insider trading and explores the grey areas that challenge market integrity in the 21st century.

• Insider trading is the use of non-public, market-sensitive information to gain an unfair trading advantage

• It involves insiders like executives, advisors or anyone with access to privileged data

• The offence occurs when this information is used to buy, sell or tip others for personal gain

• It undermines market fairness by giving some individuals an unequal advantage over others

What is insider trading?

Insider trading involves the unlawful use of privileged information to trade securities. It typically involves three main elements:

• Privileged information: This refers to precise, non-public, market-sensitive information. When disclosed, it can significantly affect a security's price. Examples include merger plans, financial results, regulatory updates or leadership changes. The information is "privileged" because it provides a major advantage to those who possess it.

• Insiders: An insider is anyone with access to privileged information. This includes directors, board members and major shareholders, as well as employees, advisors and personal connections. Insider status often depends on the circumstances under which the information is obtained.

• Trading based on privileged information: The offence occurs when insiders use this information to buy or sell securities before the public knows, gaining unfair advantages. Even sharing "tips" can count as insider trading. The scale of the transaction doesn’t matter—what’s illegal is the misuse of non-public information.

Forms of insider trading

"Front running": anticipating client orders

This unfair practice involves brokers or traders using their knowledge of client orders to trade for their own benefit before executing the client’s orders. By anticipating price movements, they profit at their clients’ expense.

Example: Citadel Securities (2020)
In 2020, FINRA fined Citadel Securities $700,000 for front running between 2012 and 2014. Citadel's traders manually executed large client orders while also trading on their own behalf. This practice caused a conflict of interest, with client orders often sidelined.

"Scalping": creating artificial demand

Scalping occurs when an insider promotes a security they’ve already invested in, boosting its price by generating artificial interest. Once the price rises, they sell their holdings at a profit, often misleading their followers.

Example: Forster Winans (1985)
Forster Winans, a Wall Street Journal journalist, pre-informed brokers about his stock market columns. The resulting price movements allowed brokers to profit, with Winans receiving a cut. Convicted of fraud and theft, he served 9 months in prison.

"Reverse insider trading": avoiding losses

In this scenario, insiders use privileged information to minimise losses. For example, selling shares before bad news is made public. Even without profit motives, this is still market abuse.

Example: Martha Stewart (2003)
Martha Stewart sold nearly $230,000 worth of shares in ImClone Systems before bad news caused the stock to crash. Although her profits were modest, she was convicted of obstructing justice and served 5 months in prison.

"Daisy chains": cascading insider networks

Daisy chains involve the spread of privileged information through a network of individuals. Each person uses the information to trade advantageously, making these cases harder to trace.

Example: Poughkeepsie Hospital network (2023)
In 2023, a group of doctors and their connections used insider knowledge of a pharmaceutical acquisition to make $4 million in profits. The chain included over 11 people, with sentences handed down for key players in 2024.

What sanctions does an insider trader face?

United States

• Qualification: Crime ("Felony")

• Criminal penalties: Up to 20 years of imprisonment for individuals

• Financial and administrative sanctions:

  • Restitution of illicit profits

  • Fines: up to $5 million for individuals, $25 million for companies

  • Prohibition from holding management positions

France

• Qualification: Offence, Administrative violation

• Criminal penalties: Up to 5 years of imprisonment

• Financial and administrative sanctions:

  • Fines: up to €100 million or 10 times the profits made

United Kingdom

• Qualification: Crime ("Criminal offence"), Administrative violation

• Criminal penalties: Up to 7 years of imprisonment

Germany

• Qualification: Criminal offence ("Straftat"), Administrative violation

• Criminal penalties: Up to 5 years of imprisonment

• Financial and administrative sanctions:

  • Fines: up to €15 million or 15% of turnover for companies, up to €5 million for individuals

The approaches to insider trading differ significantly between the United States and Europe, reflecting contrasting legal traditions.

The American approach to insider trading is subjective, focusing on the relationship between the insider and the source of the information. It is grounded in the concept of a "breach of fiduciary duty," which refers to the violation of an obligation of loyalty and confidentiality. A crime is considered to occur when someone uses confidential information in breach of this duty, which can stem from a specific relationship, such as between an executive and shareholder or lawyer and client, or from circumstances that create a trusted connection.

In contrast, the European approach is more objective and revolves around the possession and use of privileged information itself. Under this framework, simply holding and using such information to execute a transaction constitutes an offence, regardless of how it was obtained or whether a duty of confidentiality exists. The fault lies in the unfair informational advantage, as equal access to information is a fundamental principle.

Are cryptocurrencies affected by insider trading?

Yes, cryptocurrencies are highly susceptible to insider trading, as demonstrated by the high-profile Coinbase case. In April 2022, the US Department of Justice charged three individuals, including Ishan Wahi, a former Coinbase product manager, with insider trading involving token listings.

Wahi, who worked on Coinbase’s listings team, tipped off his brother and a friend about upcoming crypto listings on 14 occasions. They purchased these tokens on other exchanges before the public announcements and sold them at a profit once the listings went live. Coinbase’s reputation and market size ensured that any token listed on its platform experienced a sharp and immediate price increase. Between June 2021 and April 2022, the scheme generated over $1.5 million in profits. In May 2023, Wahi pleaded guilty and was sentenced to 2 years in prison.

Since this case, responsible exchanges like Bitpanda have enhanced internal controls to protect sensitive information. For instance, Bitpanda has implemented strict protocols to limit employee access to confidential data.

Beyond listing information, insider trading in Web3 often takes creative forms, including:

• Developers secretly buying large amounts of their project’s tokens before announcing significant partnerships

• Influencers acquiring low-profile tokens, promoting them to their audience, and selling at the peak price

Crypto assets are particularly vulnerable to these practices due to their unique characteristics:

• Extreme price volatility

• Pseudonymous transactions

• Relatively immature regulation

• Concentration of crucial information among a small group of key players, such as developers, "whales", and exchange platforms

These factors create significant information asymmetries, making crypto markets a prime target for manipulative behaviours.

Conclusion: can insider trading be legal in certain circumstances?

There are a few rare exceptions where using privileged information is not punishable, but these cases are highly specific and strictly regulated”

• One such exception occurs when privileged information is obtained purely by chance and has no connection to an insider function or status. However, this is not a free pass—you must be able to prove that the information was acquired accidentally.

• Another exception applies to long-planned transactions, such as when an insider participates in a pre-scheduled share buyback programme and does not modify their orders based on any newly acquired privileged information.

• Insider trading may also be permissible if it involves a strategic investment, such as a reference shareholder increasing their stake in a manner that is already known to the market.

• Finally, certain "market making" scenarios offer an exception, where intermediaries are obligated to maintain the liquidity of a security, even if they possess privileged information.

Despite these exceptions, the rules are extremely strict, and the boundaries are often unclear. Legal uncertainty is a real risk, and crossing the line can result in serious consequences. The golden rule remains: when in doubt, avoid trading if you have privileged information. A missed opportunity is far better than the risk of an indictment.

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Frequently asked questions about insider trading

Can insider trading occur without making a trade?

Yes, in Europe, even sharing privileged information can be an offence, irrespective of personal financial gain. Under the "tipper-tippee" theory, the person providing the information (tipper) is held accountable if they knew or should have known that the recipient (tippee) would act on it. Merely enabling others to trade based on inside knowledge is sufficient to constitute an offence.

Do insider trading rules apply to family members?

Certainly. Family members, such as spouses, parents, or children, are classified as secondary insiders if they gain access to privileged information. Even without a direct connection to the company, they can face prosecution if they use such information to trade. This highlights the importance of maintaining confidentiality, even within private circles.

What is the "grey list"?

The grey list, also known as the watch list, is a confidential internal record maintained by companies. It includes individuals likely to have access to sensitive information, such as executives, advisors, or major shareholders. Those on the list are subject to restricted trading windows and closer monitoring of their transactions, serving as a reminder of their duty to maintain confidentiality and abstain from unauthorised trading.

How are insiders typically caught?

Regulatory agencies like BaFin, AMF, or FCA rely on various indicators to identify insider trading. Suspicious patterns, such as trades executed just before major announcements, unusually high profits, and documented connections between insiders and traders, often trigger investigations. Whistleblower reports also play a significant role in uncovering such offences.