What is insider dealing? And what is market abuse? Being accused of insider dealing or trading and market abuse is serious and can lead to severe fines and imprisonment. It’s important to understand insider dealing legislation so that you’re always acting lawfully. In this article, we will explain insider dealing, insider dealing legislation, market abuse and market manipulation.
What is Insider Dealing?
What is insider dealing or trading? Let us first define insider trading (according to Merriam Webster):
the illegal use of information available only to insiders in order to make a profit in financial trading
Insider dealing is the term given to the trading of stock or other securities, such as bonds or stock options, by people ‘on the inside’ who have access to private information about the company. This inside information specifically relates to information that, if published, would have a significant effect on the price of shares in a company.
An investor with private information regarding stock is considered to have an unfair advantage over other investors who are not privy to this information. Insider dealing legislation means that anybody who trades based on non-public information is guilty of illegal activity. So, individuals should only trade using material information found in the public domain.
There is an ongoing debate over whether or not insider dealing should be illegal. In part, this is because most insider trading is not detected. However, it’s also because there is some question over whether insider trading is detrimental to any party in a legal sense. Nevertheless, insider trading in the UK has been illegal since 1980. The Financial Conduct Authority (FCA) maintains that insider dealing is not a victimless crime and is deemed fraud according to UK insider trading laws.
Insider Dealing Legislation – What Constitutes Insider Dealing?
What constitutes insider trading? According to insider dealing legislation under the Criminal Justice Act 1993, an individual is committing a criminal offence if:
- they use inside information which is price-sensitive in relation to shares;
- they deal shares related to the inside information; or
- the dealing takes place on a regulated market or via a broker.
Insider dealing legislation states that perpetrators can be defended if:
- they were not expecting the sensitive information to glean a profit;
- they were under the impression the information was widely known; or
- they would have bought or sold the same shares even without access to the private information.
What is Market Abuse?
The terminology ‘market abuse’ is often brought up when discussing insider trading and insider dealing legislation. So, what is market abuse? Market abuse describes circumstances where unlawful behaviour takes place in regards to financial markets.
The types of market abuse include market manipulation and insider dealing (or insider trading) as well as the following:
- Improper Disclosure – Where protected information is disclosed to unauthorised persons, either directly or via loss of control of the inside information. This also includes circumstances where there is reasonable likelihood information has been disclosed, such as in the event of a burglary or electronic data breach.
- Misuse of information – When information that is available and accessible is handled and disclosed in a way that would influence a decision from an investor on whether to deal.
Individuals who commit market abuse could end up being under market abuse and insider dealing investigation.
What is Market Manipulation?
Market manipulation occurs when someone intentionally discloses false or misleading information to influence the price of shares for their personal benefit. Examples of market manipulation include, but are not limited to:
- Churning – Where a stockbroker attempts to increase activity in a client’s account by buying and selling orders at the same price with the intention to drive up the price, thereby deceptively attracting more investors.
- Ramping – Spreading rumours or creating inaccurate activity to raise stock prices.
- Bear Raiding – Where a stockbroker tries to short sell a security and drive prices down, making a profit by allowing it to be re-bought at a lower price.
- Cornering – Acquiring enough of a certain commodity to gain control and establish the price for it.
- Transactional Manipulation – Raising an investment price to an irregular level by trading in a way that creates a false impression on the true supply or demand for the investment.
- Device Manipulation – Any form of deception or contrivance regarding trading or placing orders which employs fictitious devices.
- Dissemination – Providing false or misleading information regarding an investment, or acting as an issuer of investment and providing false information to manipulate the transaction.
- Distortion and misleading behaviour – Giving a false impression surrounding the supply or the demand for an investment, including behaviour that leads to distorting the investment market.
Although it can be difficult to detect insider trading, insider dealing legislation and investigation can lead to prosecutions, resulting in a fine and up to seven years of imprisonment. If you believe you are being investigated for insider dealing or other types of fraud, you can find out more about hiring a solicitor and how our fraud barristers fit into the process on our page dedicated to the topic.