Category: Worldwide Insider Trading Laws


The business of rooting out insider trading and market manipulation has gone high-tech.

Brokerage firms and stock exchanges all over the world have joined traditional market watchdogs like the Financial Industry Regulatory Authority and the Securities and Exchange Commission in using high-tech tools to quickly and efficiently quickly spot “too-good-to-be-true” trades by insiders and those who know them.

Nasdaq, Inc. NDAQ, -0.21%  , for example, uses state-of-the-art software acquired in 2010 from SMARTS Group, a leading provider of market surveillance solutions to exchanges, regulators and brokers. Nasdaq is using that acquisition to diversify its commercial technology business and provide the same tools it used in-house to 40 marketplaces, 11 regulators and 100 market participants across 65 markets globally.

A multi-faceted team of markets, legal, fraud and financial reporting compliance professionals, primarily based in Nasdaq’s “MarketWatch Center” in Rockville, Maryland tracks the activities of its listed companies and those who trade Nasdaq-listed shares in real-time around the clock. (Nasdaq’s MarketWatch has no affiliation with this publication, which shares its name.)

At the MarketWatch Center, Nasdaq watches the markets using software with a colorful graphical user interface that’s peppered with charts and graphs, helping them visualize trends and spot unusual activity as millions of trades flicker by each day.

Source: Nasdaq OMX

Graphic displaying buy vs sell interest, with buy interest as blue bars and sell interest as red bars.

Martina Rejsjö, the head of the group, relocated from Nasdaq’s Stockholm office two years ago. Her group reviewed 51,549 issuer disclosures in 2015, typically all the 8-K filings with the SEC but also the earnings press releases that go out four times a year.

Nasdaq OMX

Martina Rejsjö, Vice President of Nasdaq MarketWatch, watches issuers, participants and trading activity across asset classes and markets.

Companies must notify the exchanges about news of “a material event or a statement dealing with a rumor,” that will go out between 7 a.m. and 8 p.m. by “telephone” at least 10 minutes before the announcement is made. Nasdaq’s review of these disclosures for material market moving information resulted in 425 trading halts in 2015, down from 509 in 2014 even though the volume of disclosures reviewed was more last year.

The Nasdaq MarketWatch team sets up alerts to look for disclosure activity that could require a halt and trading activity that could signal manipulative trading or a technical problem that could also require a halt. Although her analysts consult closely all day with companies on everything, the exchange has the last word on halts, says Rejsjö. When reviewing company disclosures, they are looking for “material events” that can move the market.

• An auditor resignation or a first-time “going-concern”

• Senior executive or director changes of a material nature or a change in control

• An announcement of a reorganization or an acquisition, including mergers, tender offers, asset transactions

• A bankruptcy filing

• Deviation in actual results compared to previously issued guidance

• Previously undisclosed, surprise material news such as new products, Food and Drug Administration approvals or revised financial outlook

When looking at unusual trade activity, the analysts check for significant price movement combined with higher volumes, especially concentrated from one broker. They are also looking for larger than usual transactions and block trades. Sudden and rapid price increases or drops are seen clearly on their charts along with moves in the opposite direction of market indices such as the Nasdaq Composite or the Dow Jones Industrial Average. The team also tracks online sites for rumors, and reviews blog posts and Twitter feeds.

Source: Nasdaq OMX

MarketWatch at Nasdaq monitors velocity, based on total volume against the expected volume for a certain stock, and force – the buy:sell ratio which indicating whether there is more pressure on the buy or sell side.

The MarketWatch team reviewed 387,260 surveillance alerts in 2015, resulting in 689 referrals to Finra for further review and drill-down on the activity at the brokerage firm level. Finra has its own proprietary market surveillance software, called Sonar, that it uses to identify activity for review. That surveillance is supplemented by the referrals and tips from customers, the public or exchanges like Nasdaq.

Cameron Funkhouser, the executive vice president in Finra’s Office of Fraud Detection & Market Intelligence, said in an interview said that they receive “all kinds of market intelligence from many sources. Between the surveillance and the investigation,” said Funkhouser, “we are going broad and deep, looking at who traded and when, down to the customer level, and which accounts made money.”

A primary target for surveillance at Finra is mergers-and-acquisition activity. “The starting point may be a referral from an exchange like Nasdaq or our own surveillance alerts. We look for unusual price or volume movement, married with the trading timeline and a network analysis of the relationships between those who made profitable trades.” Finra is also responsible for reviewing options activity. “The real leverage in insider trading,” says Funkhauser, “is in options.”

Last year Finra referred approximately 421 instances of potential insider trading to the SEC, which then assesses those cases for further investigation and possibly civil enforcement action. The SEC can also make a referral to the Department of Justice for a criminal case. A spokesman from the SEC declined comment on its cooperation with Finra and the exchanges on insider trading or market manipulation referrals.

Two recent SEC insider trading enforcement actions began with Nasdaq MarketWatch referrals to Finra, said a Nasdaq spokesman. On June 3 the SEC charged childhood friends with insider trading in pharmaceutical stocks. On May 31 the SEC charged an investment banker with passing inside information to his plumber in exchange for a new bathroom.

Nasdaq also disciplines its members on its own and in conjunction with FINRA. In April of this year, Deutsche Bank Securities was fined $3 million for failing to report and failing to correctly report options positions to the required Large Options Positions Report. Deutsche Bank Securities also failed to have an adequate system and procedures for supervision related to compliance with options reporting, according to a settlement whose findings Deutsche Bank did not agree with or deny.

In March FINRA and Nasdaq announced that they jointly censured and fined Wedbush Securities Inc. $675,000 for supervisory violations in connection with its handling of a client’s redemption activity and trading of leveraged exchange-traded funds. The firm’s failures led to chronic fails to deliver in several ETFs for more than two years. Wedbush did not admit or deny the findings.

Nasdaq also fined Great Point Capital $1.05 million in December for manipulating the price discovery process Nasdaq uses to cross buy and sell orders at a single price at the opening and closing of the session. Great Point did not admit or deny the findings.



Finland, Children and Illegal Insider Trading

Other than the fact that they have millions of saunas and over 188,000 lakes, what is there to know about Finland? Well for one, through researching the Nasdaq OMX Helsinki Exchange, a couple of social scientists found a way to track previously unseen illegal insider trades.

In America, the Securities and Exchange Commission (SEC) has really cracked down on illegal insider trading by making several high-profile arrests and launching some rather extensive investigations. Now three social scientists have decided to look into a solution to illegal insider trading.

Henk Berkman at the University of Auckland, Paul Koch at the University of Kansas and Joakim Westerholm at the University of Sydney have released a new study accepted for publication in the Journal of Finance where they have uncovered a new way to spot insider trading.

The men researched over half a million stock market accounts in Finland from 1995 to 2010 on the Helsinki Exchange. The researchers chose Finland because it offered them unusual and extensive access to information about trades as well as information about individual investors.

The researchers looked at the information in many different ways including investors’ personal information like their age. As the researchers were analyzing the data according to the age of the investor they found that the accounts belonging to young children did astonishingly better than any other age group.

“We were very surprised when we first found this evidence,” Paul Koch said. “Again, we were not looking for the result we found. The group [of accounts belonging to children between the ages of zero and 10 years old] seemed to outperform all the others.”

Clearly Koch isn’t saying that a bunch of toddlers know how to make the right picks in the stock market, but their parents do. The people who operated these children’s accounts were their parents and guardians.

Koch went on to report, “We find that underage account holders exhibit superior stock-picking skills on both the buy side and the sell side over the days immediately following trades. Accounts belonging to children (and managed by their guardians) appeared to be especially prescient when it came to major company events such as merger or takeover announcements.”

Typically when a company announces a takeover or merger it typically initiates a large fluctuation in the stock market prices. The researchers discovered that the adults made the right decision about 50% of the time before a takeover announcement.

But in an unexpected discovery, the researchers found that the accounts belonging to the children made the correct decision in buying and selling 72% of the time after takeover announcements. (They noted that this isn’t 12% per year; it’s 12% per day.) As the researchers furthered their investigation they found that the parents of these children didn’t do nearly as well in their own holdings.

“Guardians are willing to trade on behalf of their children to earn these extraordinary returns, but they are reticent to trade through their own account,” Koch says. “One reason would be a fear of getting caught breaking an insider-trading law.”

Koch went on to explain that the results implied that regulators like the SEC who want to track insider trading might pay attention to successful accounts belonging to children.

When Koch was asked whether his findings from Finland were applicable to U.S. insider trading cases, he said that they were. Koch explained that the information would not be as easy to access as it was in Finland but that the SEC definitely has access to the information.

To listen to Paul Koch’s entire interview with Shankar Vedantam on NPR, click here.

Read More:

The System for Electronic Document Analysis and Retrieval (SEDAR) is a mandatory document filing and retrieval system for Canadian public companies. Similar to EDGAR, SEDAR is operated by the Canadian Securities Administrators, a coordinating body comprising the 13 Canadian provincial and territorial securities commissions.

Through SEDAR registered filing agents, public companies file documents such as prospectuses, financial statements and material change reports with the regulatory authorities, and these documents are accessible by the public to further the goal of transparency and full disclosure. Documents filed with regulators prior to the implementation of SEDAR in 1997 are available from the individual provincial or territorial securities commissions.

EDGAR, the Electronic Data-Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission (the “SEC”). The database is freely available to the public via the Internet and FTP.

Click here to visit EDGAR website : All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. Anyone can access and download this information for free.

As of 4 November 2002,the SEC required all foreign companies and foreign governments to file their documents via EDGAR. Prior to that time, electronic filing by foreign companies also was voluntary.

Actual annual reports to shareholders (except in the case of mutual fund companies) need not be submitted on EDGAR, although some companies do so voluntarily. However, the annual report on Form 10-K or Form 10-KSB, which contains much of the same information, is required to be filed on EDGAR.

After the United States stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “1934 Act”). The 1934 Act extended federal regulation to trading in securities. The 1934 Act created the SEC as an independent federal agency.

Section 16(b) of the 1934 Act addressed issue of insider trading in the United States directly. Section 16(b) prohibits short-swing profits (profits realized in any period less than six months) by corporate insiders in their own corporation’s stock, except in very limited circumstance. It applies only to directors or officers of the corporation and those holding greater than 10% of the stock and is designed to prevent insider trading by those most likely to be privy to important corporate information.

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. This insider trading law is the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.

The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.

The United States has been the leading country in prohibiting insider trading made on the basis of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S. Securities and Exchange Commission (SEC) summarize the development of U.S. insider trading laws.

 Insider trading has a base offense level of 8, which puts it in Zone A under the U.S. Sentencing Guidelines. This means that first-time offenders are eligible to receive probation rather than incarceration.

Members of the U.S. Congress are not exempt from the laws that ban insider trading, however, they generally do not have a confidential or fiduciary relationship with the source of the information they receive and accordingly, do not meet the definition of an “insider”.

%d bloggers like this: