Detecting Insider Trading

Key Indicators and Techniques for Successful Investigations

Insider Trading is illegal in most countries and is considered a form of financial fraud. Detecting insider trading is a crucial part of any successful investigation. Key indicators and techniques for successful investigations include analyzing trading patterns, identifying relationships between insiders and traders, monitoring suspicious transactions, and utilizing data mining and analytics. By understanding these key indicators and techniques, organizations can better protect their assets from insider trading by looking at hiring experienced securities fraud attorneys.

Indicators of Insider Trading

Unusual Behavior in the Trade Market

One of the most common indicators that insider trading has taken place is the presence of an unusually high volume of trading activity. This entails looking for patterns of trading behavior that could suggest that someone is making use of knowledge that is not readily available to the general public. This may involve the quick buying and selling of the same security in enormous amounts, as well as the acquisition and sale of a large number of different securities. Alternatively, it may involve trading in a variety of different securities.

Unusual Trading Volume

Another indicator of insider trading is unusual trading volume, which is typically related to the odd trading activity that was discussed previously in this paragraph. It is vital to keep a close lookout for sudden jumps in trading volume for a certain asset, particularly if the trading volume for that security is typically low or the security is relatively illiquid.

Pricing Changes That Are Not Typical

Extraordinary price swings may be another indicator of insider trading, particularly if there have been no other major news events or announcements that could account for the movement in the price of the asset in question. This is because insiders may be trading on information that they have access to before it is made public. A sudden increase or decrease in the price of a stock that cannot be accounted for by any other factor that is easily apparent may be an indication of insider trading. This phenomenon can be either bullish or bearish.

Relationships between Different Traders

The existence of connections between several traders is another significant signal of the possibility of insider trading. An investigation must be conducted into any potential linkages, either directly or indirectly, between market participants who may be trading based on non-public information. This can refer to people in your immediate family, people with whom you conduct business or any other individuals who have access to the same information that you do.

Odd Profit Levels

One of the most notable pieces of evidence that suggest there may have been insider trading is the presence of extremely high amounts of profit. This can involve analyzing the profitability of a particular investment over a particular period and contrasting that profitability with the profitability of other securities that are comparable to the security that is being analyzed. If the investment in question has a history of consistently higher returns than its peers, this may be an indicator that insider trading has taken place.

Unconventional Methods of Financial Investment

Unconventional investment strategies are one more red flag that can indicate someone is trading on inside information. This can include looking at an investor’s portfolio to see if there is a pattern of investments that could suggest the individual is taking advantage of non-public knowledge. If there is such a trend, this could indicate that the investor is using insider information.

Tip-offs

The usage of tip-offs is another significant red flag that points to possible insider trading activity. This could relate to anything from rumors to anonymous tips or emails, all of which can offer investigators with good clues and leads. All of these things can supply investigators with useful clues and leads.

Techniques for Investigating Insider Trading

Analyzing Trading Activity

Investigations into possible instances of insider trading frequently include carrying out an analysis of trading behavior. By looking at the trading history of a corporation, investigators can determine whether or not there has been trading activity in the questionable company. This can be found by studying the volume and timing of trades, as well as by comparing the present levels of trading activity to the trading history of the company. 

Another way to ascertain this is to look at the trading history of the company. Analysts can investigate not only the volume and nature of transactions but also the direction in which they are moving. Trading patterns that deviate significantly from the norm may be an indication of insider trading taking place within the organization.

Comparing Trading Activity to Other Companies

When the trading activity of one company is compared to that of other companies operating in the same industry, any potentially fraudulent insider trading can be uncovered. A warning sign might be present, for instance, if a company’s trading volume is appreciably higher in comparison to that of its competitors. If a company’s trading volume is much lower than that of other companies operating in the same industry, this may be evidence of insider trading.

Analyzing Insider Transactions

An additional strategy that can be used to unearth instances of insider trading is to analyze insider transactions. Investigators can uncover misbehavior by keeping an eye on the purchases that are made by corporate insiders. All business dealings have to be conducted in a manner that is consistent with the company’s financial filings and statements. Whenever investigators find that a company’s publicly available documents don’t match up with a certain financial transaction, they should be skeptical about the transaction.

Analyzing Media Reports

Investigations into allegations of illegal insider trading can benefit from conducting a review of relevant media coverage. By examining stories from a variety of media outlets, investigators can become aware of any potentially suspect behavior. This category also includes questionable patterns of trading, such as those that could point to insider trading being engaged in.

Analyzing Regulatory Filings

Investigations into insider trading can also benefit from careful examination of regulatory filings. Investigators may be able to find evidence of wrongdoing within a firm by reviewing the regulatory files the company has submitted. For instance, the company’s filings might not match up with the financial statements that are readily available to the public.

Interviewing Company Insiders

Conducting interviews with people who work inside a company might be a useful method for unearthing instances of insider trading. Conducting interviews with both current and former personnel of the corporation may yield information about any potentially questionable activities taking place within the organization. Any communications between company insiders can reasonably lead one to assume that one of them knows about illegal insider trading. In addition, investigators should ask employees any questions that they believe would lead them to confess to or explain any improper behavior.

Conclusion

Detecting insider trading is an important part of maintaining the integrity of the financial markets. While the techniques outlined in this article can be used to identify and investigate potential cases of insider trading, the best approach is to remain vigilant and proactive in monitoring activities that could indicate insider trading. By actively monitoring the financial markets and staying up-to-date with the latest developments, analysts can gain a better understanding of the potential for insider trading and can work to detect any potential cases. Additionally, by implementing robust internal controls and procedures, organizations can reduce the risk of insider trading and protect their assets from potential fraudulent activities.