From time to time, even among the general public, there is talk of
insider trading. To the common people, or to less experienced traders, this term brings to mind a certain type of investor who, with dishonesty and cunning, manages to access the most important information and "cheat" the market. This definition of an insider
trader is not so far from reality, but it is best not to reduce this figure to a caricature, to a movie character.
Insider trading is, in fact, a serious problem that, in theory (and not only), causes harm to everyone, even to small fish, to the point of requiring intervention by institutions. We will discuss this in this article, offering an overview of the phenomenon and explaining why
insider trading harms everyone, maybe even you who are reading this article.
What is insider trading
What exactly is insider trading? Before offering a clear and exhaustive definition, able to go beyond prejudices and false myths, it is worth specifying one aspect, which is then the most important part of this story:
insider trading is a crime. It is in almost all national legislations; only a few tax havens or rogue states do not recognize it as such. Not that there is a great risk that ordinary people will become insider traders. It is, in fact, a sophisticated crime, almost elitist. Unfortunately, like most crimes of this type, it risks harming the smallest.
In any case, insider trading is defined as
the abuse of privileged information not accessible to the public for investment purposes. In essence, the insider trader becomes aware, exclusively and in advance of others, of elements, events, and facts that can move the market, so that they can find themselves in an advantageous situation once the news is made known. The term "insider" derives exactly from the status of the person who commits this crime: they possess privileged information because they are "inside" the mechanisms of a company, an institution, an entity.
Let's be clear, it is not a crime to possess that information; at a certain level, it is inevitable. It is, however, a crime to
use it. Therefore, it is a crime, by virtue of the possession of exclusive information:
- To buy and sell, directly or indirectly, on one's own behalf or on behalf of third parties, financial instruments;
- To communicate this information for reasons beyond one's professional activity;
- To recommend financial transactions to others based on privileged information.
In short, insider trading is anything that can cause advantage to oneself and others and that exploits privileged and exclusive information.
In parentheses, the expression "privileged information" has a clear definition. In this regard, we quote that of the Consolidated Law on Finance.
"Information of a precise nature, which has not been made public, concerning, directly or indirectly, one or more issuers of financial instruments or one or more financial instruments, which, if made public, could significantly influence the prices of such financial instruments, which, if made public, could significantly influence the prices of such financial instruments".
More nuanced forms of insider trading, but no less dangerous, are tipping and tuyautage.
Tipping is simply the disclosure of this information to third parties, without offering indications on the operation to be carried out (if the interlocutor is an expert, however, they are still able to exploit the information to their advantage).
Tuyautage, on the other hand, is the exact opposite: indication without information. It occurs when the insider advises an operation to a third person, without revealing the privileged information to them. If the relationship between the insider and the trader is consolidated, the damage is done anyway: the latter trusts the former, and the fraudulent operation takes place anyway.
Why insider trading is harmful to everyone, even the small trader
Evidently, insider trading is an elitist issue; it is a crime committed by those who are involved in certain mechanisms, by those who occupy positions of power or are close to positions of power. Nothing could be further from the retail trader, perhaps from the trader who is halfway between amateurism and professionalism. Apparently, the issue does not concern them. But no: insider trading risks harming everyone,
even the small fish. The reason is quite evident, and it has to do with the behavior
always put in place by insider traders and its consequences for the market.
Those who engage in insider trading do so to earn a lot of money. Indeed, a
huge amount of money. The game must be worth the candle, since it is a risky game. Therefore, in most cases, fraudulent actions move high volumes, often
enormous ones.
So enormous as to affect the price. Thus, the insider trader not only exploits an advantageous situation but even manipulates the market. And if the market is manipulated, everyone is affected. To give an example: technical and fundamental analyses would lose effectiveness, since a hidden, unknown, "imponderable" factor would affect the price.
For this reason, even the small trader, who operates with meager capital, would suffer damage: their trades risk failing even if they have put in place all the necessary skills to understand the market and intercept price movements.
Why insider trading is not such a big problem (at least for now)
So, what can be concluded? Is the trading community, including small fish, completely at the mercy of criminals, succumbing to insider traders?
In reality, the problem is big, but not
that big. First,
there are not that many insider traders; they are not in such large numbers as to always and in any case manipulate the market, although of course, it can happen.
Secondly, national legislations have long been equipped to intercept, prohibit (before combating the crime, legislation must define it), and sanction insider trading.
The regulatory framework is particularly severe in Italy. The reference to consider is the
Consolidated Law on Finance, or Draghi Law. It was approved in 1998.
The legislation is advanced in that it provides for solid sanctioning tools but also because it provides for prevention tools. For example, those who find themselves in positions of power or privilege must communicate to CONSOB all the operations they carry out, if they concern assets related to their position.
