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Insider trading: definition and famous cases

Updated: May 01, 2024
Andrey Mastykin
Contributor
Opinions expressed by Traders Union Contributors are their own.
Reviewed by
Dr. BJ Johnson
Editor
Fact-checked by
Mirjan Hipolito
Cryptocurrency and stock expert
Expert verified
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Table of Contents

  • What is insider trading? Definition
  • How commits insider trading?
  • Why is insider trading illegal?
  • False insider information
  • Insider trading: famous examples
  • Top 3 trustworthy stockbrokers to consider
  • Webull
  • TD Ameritrade
  • Fidelity
  • Expert’s opinion
  • Reviews of insider trading
  • Related Articles
  • FAQs
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There are trillions of dollars in turnover on the global exchange markets. Sometimes, there are major transactions involving global giants or key decisions from government agencies. These phenomena significantly affect the fluctuations of certain assets such as stocks, currency pairs, and commodities, and thus their market price. And some people know about it before others, enabling the kinds of fraud with stock quotes that are called “Insider trading”.

“He who owns the information, owns the world” is a legendary quote from the great investor Nathan Mayer Rothschild. Indeed, whoever gets the information first can operate on it. However, this allows for market manipulation, so insider trading is considered a violation of exchange rules. The Traders Union shall discuss in more detail the fraud in the markets, the characteristic features, consider legendary cases, and also find out why insider trading is illegal.

What is Insider trading? Definition

An insider is a person who has access to closed, confidential information that is inaccessible to most people. When applied to financial markets, insiders can be:

  • Board members of large companies or banks;

  • Politicians and government representatives;

  • Representatives of National Banks or State Financial Commissions; etc.

Moreover, there are so-called “random” insiders. These can be ordinary company employees who accidentally heard important information or relatives of representatives of the company's top management or influential politicians. Now let's answer the question, what is insider trading. This is trading by insiders. Based on their information, they can trade in the financial markets, moreover, using large amounts.

How does insider trading work?

Insider trading implies the conclusion of transactions based on the information obtained. If this is positive information (for example, a merger of large companies), the insider will conduct bought deals. If the information is negative (for example, an unpublished earnings report), the investor will sell the securities.

Insider trading works as follows:

  • Insider learns of important information relative to the market;

  • He makes a buy or sell deal until the information is officially published.

  • After the information is published, the quotes move in the right direction, due to which the insider either increases his profit (when buying shares) or fixes it and will be able to buy shares very cheaply in the future.

Moreover, insiders can share information with their friends, colleagues, or relatives or even sell the data.

There are several noticeable insider trading features. Of course, they are not guaranteed evidence, but they may indicate that the trades may have been insiders.

Let's consider a few of these features. There may be:

  • Sudden, unexpected trend movement. If a sideways trend was observed on the chart for a long time, and suddenly, any movement appears, this may indicate that someone learned the important news before the rest.

  • Strong trend movement or sharp reversal unaccountably. If this happens, then there is a possibility that someone is trading based on inside information.

  • Unreasonably large transactions. Risking big money without any certainty is a rare case. It means, probably, the investor has some more information.

Again, these “signals” are not guaranteed indicators of insider trading. However, if you found them, there is a possibility that an insider entered the market.

Why is insider trading illegal?

Everybody wonders why insider trading is illegal. Insider trading is indeed illegal in most countries in the world. It is also illegal in the United States as well. There are three main reasons why this type of trade is considered illegal.

  • Lack of effective competition. If a person received information ahead of time and used it, this grants him a privileged position over other market participants;

  • The advantage for majority shareholders. Since in most cases insiders are large investors and majority shareholders, the use of insider trading harms regular retail investors, who are the majority in modern financial markets;

  • Leads to instability in the economy. Insider trading can create serious problems or even destroy a large company. The consequences of such a collapse can affect even the state or the whole world.

A trader can be dismissed, fined, or even sentenced to imprisonment for the use of insider information.

False insider information

Retail traders often suffer from this type of false insider information fraud. A certain investor who calls himself an insider may spread false information and open a trade in the right direction, expecting to be “dispersed” by people who believed the “insider”.

The alternative is selling false information. An “insider” can directly contact an investor with an offer to buy information about any major trade. Fraudsters may introduce themselves as employees of large companies or hackers who have stolen information. As a result, the trader buys information and opens a trade, and loses money.

Insider trading: Famous examples

There are a large number of insider trading cases. Many of them were discovered due to an ordinary accident or a person’s indiscretion. Let’s consider a few insider trading examples that became notable.

Martha Stewart and insider trading

Martha Stewart became famous in the United States as an author of books on home economics and TV host of various shows on the topic. However, her reputation was severely damaged in the aftermath of an insider scandal. The Martha Stewart insider trading scheme was associated with information obtained from Sam Wexal, owner of the ImClone Systems pharmaceutical firm. In 2001, he told Martha that the development of the announced cancer drug had failed. As a result, Stewart sold her shares, and thus managed to make a profit of $45,000.
Regulatory authorities became interested in the sale of ImClone Systems shares. Wexal actively disseminated information even before the release of the statement, which accordingly affected the quotes. Martha Stewart was among the “victims”. The court sentenced her to imprisonment for 5 months. Due to this scandal, the quotes of the Martha Stewart Living Omnimedia media holding collapsed, which led to significant financial losses for the TV presenter herself.

Spiegelman and insider trading

One of the most notorious insider trading scandals took place against the backdrop of a merger between Procter & Gamble and Gillette. The deal was to be made by Merrill Lynch Bank. Bank employee Stanislav Spiegelman knew about this and shared this information with his friends and colleagues from the rival bank Goldman Sachs, Evgeniy Plotnik and David Pajcin.
Using this information, the bankers managed to earn about $100,000 on stocks. Moreover, colleagues provided their relatives and friends with this information. So, a friend of Pajcins Monika Vujovic earned $313,400 from this information, Plotkin's father earned $63,000 and Plotkin's softball partner Elvis Santana earned $463,200.
The partners wanted to use a similar scheme in the Adidas and Reebok merger. Stanislav Spiegelman also knew about this deal. However, the conspirators failed because of the careless dissemination of the information. When Pajcin's aunt, a 63-year-old retired seamstress, earned $2 million, the regulatory authorities launched an investigation. The United States Securities and Exchange Commission (SEC) established that inside information was used. Plotnik and Spiegelman were sentenced to 38 months and 58 months in prison, respectively. Pajcin violated probation and absconded from the United States.

Peter Cho and insider trading

Peter Cho's story is an example of accidentally acquiring key information. The incident happened in 2016. Cho's wife was an investment banker who worked for Bank of America. She was once discussed over the phone a Virgin Airlines deal to buy Alaska Airlines.
Peter Cho overheard this conversation by chance and decided to make some money on it. Cho placed a bet on binary options by choosing the buy option. The amount of the deal opened by him was $250,000. The insider earned $500,000 on the data obtained.
However, Cho's quick riches interested the SEC. The Commission ruled that he was using insider trading. Cho didn’t deny his guilt but didn’t admit it either. He agreed to return the amount earned and pay a fine in the same amount at the pre-trial settlement. In total, Cho had to pay a fine of $532,000. The story also stained Bank of America's reputation.

Top 3 trustworthy stockbrokers to consider

Choose a reliable broker if you plan to work with stocks and other types of securities. The company must be reliable, reputable, guarantee timely withdrawals, and fast order processing. Traders Union has selected for you the top three brokers that, according to our experts, are reliable and provide the trader with a wide range of assets and trading functions.

Minimum deposit Markets Regulation

Webull

1 USD

Stocks, ETFs, options

USA (SEC)

TD Ameritrade

1 USD

Stocks, ETFs, funds, bonds, options, Forex, futures, cryptos

USA (SEC)

Fidelity

1 USD

Stocks, ETFs, funds, bonds, options

USA (SEC)

Webull

Webull Review

Webull is a relatively young broker. The company began operations in 2017. Its activity is carried out based on SEC license No. 8-69978. Also, Webull is a member of FINRA and SIPC. Under the SIPC's obligations, Webull guarantees refunds to clients for equity trading up to $500,000.

Stocks are the priority line of activity of Webull. The company provides access to 3 markets:

  • NYSE;

  • NASDAQ;

  • CBOE EDGX.

The company also allows you to work with ETFs and options. Trading commissions at Webull are 0% on all types of assets. Trading with a broker is carried out in its proprietary trading terminal. Online, desktop, and mobile versions of the platform are available. Traders also have access to analytics and trading ideas from Webull experts.

TD Ameritrade

Review

TD Ameritrade is among the oldest companies in the global financial markets. The broker has operated successfully since 1975. The company is licensed by the SEC, license No. 1-35509. Moreover, the broker is a FINRA, CFTC, and SIPC member and guarantees a refund on deposits up to $500,000.
TD Ameritrade offers access to over 10,000 assets. Traders can work with Forex and cryptocurrencies. The company provides access to 75 currency pairs. Investors can trade stocks, bonds, funds, options, etc.

The broker provides access to 4 markets:

  • NYSE;

  • NASDAQ;

  • AMEX;

  • OTCBB;

Investors can carry out over-the-counter (OTC) transactions in stocks. The commissions for such trades are $6.95 per contract. American stock exchange trading is commission-free.

Fidelity

Fidelity Review

Fidelity is a broker that has been operating since 1946. The company operates under the SEC CIK license #0000744822. The broker is a member of SIPC and FINRA. Fidelity is included in the top-tier of the SEC, which confirms its reliability and trust in it from the side of the regulator. Fidelity is focused on investment tools. The company offers to trade in stocks, ETFs, funds, bonds, and options. The broker provides access to 22 global markets where you can trade shares of American, European, and Asian companies. Also, the company has nine options markets and over 100,000 bonds.
Trading stocks, funds, and ETFs on Fidelity is commission-free. Commissions are provided only for options ($0.65 per contract) and bonds ($1 per contract). Trading is carried out in the proprietary terminal. There are a large number of analytical materials from the broker's experts.

Expert’s opinion

Insider Trading is commonplace in the financial markets. Many people learn information and try to use it for their purposes. With the help of insider trading, people earn tens and hundreds of thousands of dollars by buying or selling shares of companies and manipulating the currencies of many countries, etc.

However, remember that insider trading is illegal. If you use such information, you violate competition in the markets, exposing both businesses and traders. Insider trading is prohibited by most countries and individual exchanges, so if you try to use such information, there is a high probability of sanctions against you, up to and including imprisonment.

Also, don't agree to use the information if someone offers you insider information. This is a common scam. There can be no guarantees here, and it is impossible to verify the data provided by the stranger.

Antony Robertson

Antony Robertson,

Traders Union Financial Analyst

Reviews of insider trading

I’ve had experience with insider trading. At the beginning of my career, I got a tempting offer from one person to invest a large sum in the shares of a world giant, which was on the cusp of a major deal. I agreed, but at the last moment the deal failed and I lost a large amount. Since then, I have avoided inside information. The risks of failure or claims from the SEC are much higher than the potential profit.

Trisha Tilberg

Trisha Tilberg

manager

Dallas

In our company, there was a case when one of the employees accidentally heard classified information and tried to sell it. When we found out about this, he was fired, and our plans changed. I am actively working in financial markets and know what insider trading is, but I avoid using such inside data. Although I often notice the inexplicable movements with the quotes, everything becomes clear after a few days. I never apply the information because I know about my company and it can cause serious damage to reputation and business relationships.

John Dobbs

John Dobbs

board member

New York

I am often offered various inside information, but I always refuse it. The probability that this information will turn out to be false is too high; therefore, I prefer to trade exclusively on my own. I advise you to gain knowledge and experience in the financial markets, and not try to make money in such a dishonest way. When you trade on your own, you make your own decisions based on your personal knowledge, information, and conclusions.

Terrance Dong

Terrance Dong

expert trader

Hong Kong

FAQs

Do brokers and exchanges track insider trading?

Yes. Brokers, exchanges, and regulatory authorities are constantly monitoring transactions, and if there is a reason to suspect insider trading, an investigation will be initiated.

Can brokers cancel trades that they consider to be insider?

This option is possible, but not required. An investigation is usually initiated against the insider, following the results of which punishment shall be imposed.

Can brokers block accounts due to insider trading?

They usually reserve this right. Each broker has an individual policy, so before you start working with them, study the Terms and Conditions in detail. However, insider trading is usually investigated by securities regulators such as the SEC. Law enforcement agencies can also control high-profile cases.

I am offered inside information with payment after a successful trade. Shall I agree?

Absolutely out of the question! First, insider trading is illegal and you run the risk of being blocked or even prosecuted. Second, the fraudster doesn’t risk anything. If the trend goes in the right direction, then you will pay him. If not, you will lose money on the trade.

Glossary for novice traders

  • 1 Insider trading

    Insider trading is the illegal practice of buying or selling a company's securities (such as stocks or bonds) based on non-public, material, and confidential information about the company. This information is typically known only to insiders, such as company executives, employees, or individuals with close connections to the company, and it gives them an unfair advantage in the financial markets.

  • 2 Broker

    A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.

  • 3 Trading

    Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.

  • 4 Investor

    An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.

  • 5 SIPC

    SIPC is a nonprofit corporation created by an act of Congress to protect the clients of brokerage firms that are forced into bankruptcy.

Team that worked on the article

Andrey Mastykin
Andrey Mastykin
Author, Financial Expert at Traders Union

Andrey Mastykin is an experienced author, editor, and content strategist who has been with Traders Union since 2020. As an editor, he is meticulous about fact-checking and ensuring the accuracy of all information published on the Traders Union platform. Andrey focuses on educating readers about the potential rewards and risks involved in trading financial markets.

He firmly believes that passive investing is a more suitable strategy for most individuals. Andrey's conservative approach and focus on risk management resonate with many readers, making him a trusted source of financial information.

Read more
Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

Read more
Mirjan Hipolito
Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Read more