Definition of insider trading

This is defined as any confidential price-sensitive knowledge and data that can provide an unfair advantage when buying and selling shares of a publicly traded company.

The definition of an insider depends on the country where the case arises. In the US insiders include any company employee, trader, or non-employees of the company who might be deemed to be in possession of insider information.

In contrast, in other countries such as the UK, insiders refer to only the people who work inside the company, board members, i.e., executive and non-executive directors, former directors who are no longer board members, and Person Dispensing Managerial Responsibility (PDMR) meaning any non members of the board but employees considered to be party to price sensitive information. These individuals are subject to the same rules and their transactions are reported under the listing rules.

There are undoubtedly some cases of insider trading particularly before information is released because the gains from trading on such information may be higher than the potential costs of being caught, particularly since some events lead to a substantial change in the stock price.

Thus, one would expect insiders to trade strategically: they will not trade on all insider information, but they may target some specific information to trade on. The issue is whether the authorities have the ability and the means to analyse all the large amounts of trading that is taking place in the market before any price sensitive information is released.

Should trading by outsiders on insider information also be referred to as insider trading, in the same level as trading by people who are literally insiders in the firms? It is already difficult to ascertain that an insider is trading on private information, but it is much more difficult to find out an outsider trading on private information, as the case of Rajat Gupta and Raj Rajaratnam illustrates.

In 2012, the jury found that Mr Gupta, a former Goldman Sachs director and head of McKinsey, had provided corporate secrets to Mr Rajaratnam, the Galleon Group founder who was given an 11-year sentence for insider trading in 2011.

The Rajaratnam case highlighted the complexities of finding and prosecuting trading on private or insider information. [1]

Gupta trial: the key characters

Rajaratnam sentenced to 11 years in jail

In depth: insider trading scandal

Interactive graphic: the insider trading scandal