Who are insiders and what is called insider information?

Insider - what is it? This word came to us from the English language. It is especially popular in the business sphere, where there are already a lot of Anglicisms. “Inside”
from English into Russian as “inside”
.
But it’s funny that, on the contrary, from Russian into English, even Yandex Translator translates the word “insider” as “ Inside information ” - that is, “insider information”
. And this is exactly what we mean by this word.

Error!
Do not confuse the word “insight” with another English word – “insight”! So, if you are looking for what insight is in psychology, we are clearly talking about insight with a “t”. I have a separate article about him.

Who is an insider and how to become one?

The term “insider” literally translates from English insider as “initiated,” that is, possessing secret information. Stock markets are more dependent on information than others, so investors, brokers, dealers and banks are constantly monitoring the market.

Misuse of inside information and attempts to manipulate markets are serious offenses that undermine the integrity of financial markets and the overall investment climate.

Methods for preventing abuse in the securities markets are a necessary tool for building a healthy competitive environment and a guarantor of the stable state of the economic system and its development.

In the information age, on the one hand, the task of real-time market research is greatly simplified. On the other hand, security measures for government institutions, large industrial, trading and financial companies are being increased.

In general, insiders are professional participants in the securities market who are constantly engaged in stock trading and have exclusive information.

Outsiders on the stock exchange are individuals who trade inconsistently and base their actions solely on publicly available information. The market situation for outsiders is obviously a losing one, all other things being equal.

To become an insider, you need to get one-time or permanent access to non-public data. It is possessed by top managers or co-owners of companies, banks, officials at various levels and other persons.

Even weather information affects some markets, so information from weather officials is important when making decisions. In practice, many bank employees, brokers, and dealers have friends in various government agencies, from where they receive insider information through non-public communication channels.

Kinds

Market participants use the following concepts in the context of insider data:

1. Bank insiders are support staff, sales managers, top managers who transmit information to market participants.
2. Share insiders are employees of a public joint stock company who have access to financial information, investment and emission plans of the company.
3. A market insider is a person who collects information about the market as a whole, including non-public information.
4. Third party insiders – lawyers, insurance companies, notaries and other service providers.
5. An insider exchange is an association of persons offering insider information, usually represented on the Internet.

List

On November 23, 2012, the Association of Banks of Russia developed guidelines for compiling lists of insiders. This document is relevant for all financial institutions.

"List of Insiders" MICEX - a system for creating, maintaining, storing, recording and transferring to the trade organizer a list of insiders in accordance with Art. 9 No. 224-FZ, access to which is available to persons registered on the exchange website.

The “Insider Lists” system on the Moscow Exchange

Main varieties

The insider is the key character responsible for the information leak. Modern analysts identify several portraits of such individuals.

Negligent

Perhaps the most common type. This includes employees who violate the rules of concealing confidential information with the best intentions. Example: an insider takes confidential information out of the office to continue working at home, but leaves the papers in a taxi or cafe. As a result, the data ends up with third parties, who are not always respectable and law-abiding.

Manipulable

Employees who disclose information after becoming victims of deception. Example: a person calls the office, introducing himself as the director’s authorized representative, and asks for certain reports. The secretary gives all the necessary information, without even realizing that he is being manipulated by insiders.

Offended

Malicious trespassers. Their goal is to harm the company, and therefore they declassify confidential data quite deliberately. The hallmark of aggrieved insiders is their personal motives.

Disloyal

Employees, after leaving as much information as possible. Such would-be insiders often do not even suspect how and where they will use the obtained information.

Moonlighting

Those who declassify data seeking profit. As a rule, they have a specific customer who sets the requirements.

Implemented

Former employees of competing companies who took a job in order to obtain the necessary information. One of the most dangerous types of offenders.

Insider Law

With the adoption of Federal Law No. 224-FZ in 2010, the regulatory framework developed in previous years was consolidated. Amendments were made to the Civil, Administrative, Criminal Codes of the Russian Federation, to the laws “On the Securities Market”, “On Banks”, “On Investment Funds” and others. The law defines insider information and describes market manipulation.

A fine line between violation of trading on the market when using insider information and its legality is drawn in Law No. 224-FZ.

The insider is subject to administrative, civil or criminal liability for market manipulation or fraudulent activities. The law does not provide a single form of guilt for acts that constitute market manipulation. However, the intentional form of guilt is either directly indicated for a specific composition, or is determined within the meaning of the relevant norm.

From the point of view of protecting bona fide participants in the securities market, it is preferable to extend the tort to market manipulation, which is expressed in a categorical ban on causing damage to property.

An indication in the text of the deliberate nature of the actions of a market participant should be interpreted as a condition for compensation for damage and bringing to public legal liability.

In this case, Articles 59 and 185 of the Criminal Code of the Russian Federation apply.

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What is inside information (AI)?

The legal problem with this definition lies on several levels. The specificity of such an offense as the illegal use of insider information determines the difficulties that foreign and Russian legislators face when trying to resolve its civil consequences.

Although part 7 of Art. 7 of Law No. 224-FZ speaks of the right of persons who have suffered material damage as a result of the unlawful use of insider information to demand compensation from the violator; the mechanism for implementing such a right in the legislation has not been fully developed.

The courts in their decisions are guided by arbitration practice, decisions of the Supreme Arbitration Court and the Supreme Court of the Russian Federation.

Insider information of the Central Bank of the Russian Federation is data that is not located on the Bank of Russia website and is classified. This may be information about the suspension and revocation of licenses, about planning the size of the discount rate, about foreign exchange interventions, and so on.

Generalized features

Insider information has the following characteristics:

• specificity and accuracy, no speculative nature;
• not intended for public access;
• the dissemination of such information has a significant impact on the prices of securities market instruments;
• included in the list of insider information of an organization or institution.

List and position

The list of insider information depends on the person possessing it and local orders and instructions of the organization.

So, for issuers, these are decisions of the general meeting on the issue, on concluding transactions, approving development plans and other information. The list of insider information is compiled in accordance with the instruction of the Central Bank No. 3379-U dated September 11, 2014 “On the list of insider information.”

The Insider Information Regulation is an internal document of the company that lists the list, access and procedure for disclosing insider information.

Such provisions exist in all large companies, such as Gazprom, Aeroflot, MTS, as well as in financial institutions.

How can AI be used and for what purposes?

Insider information is used in the securities market when making decisions on transactions. The amount of information about the counterparty and its securities reduces the risks of transactions with this counterparty. RCB participants need to be careful and sense the line that cannot be crossed.

Order of access: general provision

Since the specifics of providing information may vary from one case to another, we will consider them using a specific example of a fictitious bank. So, he must first indicate in the regulatory documents that everything was developed in accordance with the current legislation of the Russian Federation. Then the necessary terms are defined, the procedure for using the data is directly drawn up, and finally the rules of protection are drawn up.

Privacy level

The degree of accessibility of non-public data is determined by an internal document of the company based on instructions from the Central Bank of the Russian Federation and structures such as the Association of Russian Banks.

The ARB, in its decision dated February 15, 2011, recommends:

• ensure the confidentiality of insider data is maintained in accordance with the bank’s local legal acts;
• if the status of a person who has access to insider information is lost, such person is obliged to transfer media with insider information to the bank;
• Immediately inform your immediate superior or his deputy about the shortage or loss of documents containing insider information, passes, passwords, or keys to the safe.

Procedure for disclosing your own AI

Disclosure of insider information is defined in Article 8 of Law No. 224-FZ. It states that the procedure and terms for disclosing such information are established by regulations of the Central Bank of Russia, unless the law provides for a different procedure for disclosing insider information.

Bodies and organizations, the Bank of Russia must provide or disclose insider information on their official websites no later than the next business day after its appearance (occurrence).

Disclosure Example Diagram

Insider agreement

An insider contract is a contract with an employee of a company, usually a senior manager. In addition to the rights, it lists the employee’s obligations to maintain confidentiality while working in the organization, as well as for the period specified in the contract after dismissal.

Finviz.com

The website finviz.com enjoys well-deserved popularity among investors. There's a lot of useful information here:

• financial news from around the world;
• a convenient screener with which you can search for undervalued and overvalued stocks;

• visualization – composition of indices, location of companies on charts taking into account multipliers, reporting, etc.;

• information on futures for major products;
• rates of currency pairs on Forex and major cryptocurrencies.

You can also do backtests there and glean a lot of insider information. Again, the site takes basic information from Form 4 SEC. But everything is presented there more clearly and interestingly than on other services.

Protecting information from insider attacks

With the advent of sophisticated methods for obtaining non-public data, the problem of choosing protection systems against insider threats has become urgent. This market is quite clearly segmented. For large companies, comprehensive data protection measures and software are offered.

Protecting data from leaks and insiders

At the present stage, five main components of protection :

1. Systems for detecting and preventing leaks through telecommunication channels.
2. Internal controls. Includes enterprise security service, job descriptions, and software.
3. Authentication systems for access to resources.
4. Preventing misuse of IT resources.
5. Archiving of corporate correspondence.

What is insider trading?

Stock market insiders have a significant advantage over regular short sellers and outsiders. Corporate insiders in the stock market appear to be informed long-term investors.

As a rule of thumb, insiders tend to buy shares at low levels, but this is not a general rule. Around the peak of stocks, the size of their purchases is usually noticeably reduced. The insiders are followed by the rest of the players.

Top managers of the company have insider information on shares, their issue, placement, and profitability. It is also partly available to depositories, registrars, and clearing centers. Leakage of information from these persons to the market could seriously damage a public joint stock company. The beneficiaries of such a leak take advantage of the ignorance of other players.

Any person can buy insider information on aggregator sites, thematic forums, and blogs. Another question is how reliable such information is and how legal it is and in accordance with Law No. 224-FZ and articles of the Criminal Code.

Identifying insiders is a very difficult task. In the United States, whose stock market has been the largest in the world for more than a hundred years, network analysis of insider actions is used. To do this, millions of transactions with hundreds of thousands of participants are analyzed over a period of several decades, which is only available to large research centers.

Only analysis of a large amount of data will help build a confident case against an insider trader.

An example of Rothschild's manipulation

To understand the inside story, the story of the manipulation of the UK stock market by Nathan Rothschild in 1815 is often cited as an example. Then the Battle of Waterloo took place between the united armies of European countries and Napoleon's French army.

Rothschild was the first in England to learn the outcome of the battle through pigeon mail and began to deliberately sell shares. Panic immediately arose, and other players also began to “dump” shares.

Nathan Rothschild's "pigeon scam" scheme

Persons affiliated with Rothschild immediately bought a significant amount of securities, the rate of which soared a few days later when news of the victory of the British and their allies arrived.

A famous insider is George Soros, whose intelligence allowed him to manipulate the markets of entire countries.

An example in modern history can be given in the cryptocurrency market. This market is highly manipulative, as most digital coins are owned by a small group of people (whales). Due to large volumes of transactions, whales are able to move the market in a direction convenient for them.

Example with Elon Musk

In the USA, Elon Musk twice (in 2021 and May 2021), after publishing on Twitter an opinion about the overvaluation of his own, wittingly or unwittingly sowed panic and influenced bearish sentiment.

If anyone had information about the release of such messages, he would certainly be enriched. It's not hard to guess who it was. The illegality of this behavior was assessed by the US Securities Commission, Musk was fined $20 million and removed from the company's management.

Expert opinion

Dmitry Dunyashev

Blogger, private investor, project manager real-investment.net

A similar situation occurred in Russia in 2021: there was a leak of information from the presidential administration about the possible withdrawal of 50% of profits from metallurgy enterprises in favor of the country’s budget. The share price of metallurgical companies fell sharply, but after some time the market recovered. Some business publications then wrote about a deliberate “leak” of information, but the beneficiaries were not identified for various reasons.

Aggregator SEC Form 4

But the US stock market is not the only one that lives by Nasdaq. You can see what kind of transactions American insiders are making on the website secform4.com, where all Form 4 completed by insiders are collected.

So you can dig around there and find what you need.

True, the design is straight out of the 90s and the navigation is very inconvenient, but the site performs its function.

Reference materials (download)