Insider Trading: The Bare Facts

Insider trading has always been a point of discussion for investors and regulators. Anthony Fernandes explains what exactly insider trading is and what best can investors do to protect their portfolios from being exposed negatively to such malpractices

- Anthony Fernandes

An increase in global economic activity creates one big impact – it also leads to an increase in the buying and selling activity of financial securities. While that in itself is a positive trend, the worrisome factor is that it also leads to a rise in the risks posed by malpractices of all sorts. Indeed, regulators worldwide have a tough task on hand as it is never easy to identify malignant and illegal activity, leave alone proving who the actual beneficiary is. Insider trading is one such illegal activity which provides an edge to a particular investor or a group of investors, leading the opportunist to book abnormal profits in a very short time. Insider trading defies the spirit of the investing game and is a serious punishable offence in several developed and emerging markets.

The New York Stock Exchange (NYSE) is arguably the world’s most efficient market and yet there have been instances of insider trading. Such cases of insider trading are to be found across both developed and emerging markets alike. The ill-reputed Raj Rajaratnam, who was the founder of Galleon Group, was arrested in 2009 by FBI on insider trading charges in the United States. Rajaratnam was accused of earning up to USD 63.8 million between 2003 to 2009 by adopting various illegal insider trading practices and investing in stocks such as eBay Inc., Goldman Sachs Group Inc. and Google Inc., now called Alphabet Inc.