Insider Trading
Insider trading describes a situation in which a person engages in stock trading in violation of a fiduciary duty or other relationship of trust and confidence, while in possession of material non-public information about a company's shares (Hansen, 2021). This expression refers to the dissemination of such information, the trading of stocks by the individual who has been “tipped off,” and the trading of stocks by those who have misused such information. In addition, illegal insider trading earnings can be laundered through the stock market. As a result, money laundering is both a predicate offense and a mechanism for laundering illegal funds.
Hence, Insider Trading is an offensive trade carried out based on any insider information. An insider trade must encompass the three elements including (i) insider, (ii) inside information, and (ii) insider trade.
Front Running
Also known as “Tailgating”, is the illegal practice of entering an equity trade, to profit from advance, non-public knowledge of a large block pending transaction that will affect the price of the underlying security. Front running is the illicit activity of purchasing securities based on non-public information about an anticipated significant transaction that would affect its price.
Front running, also known as tailgating, is the illegal practice of entering an equity trade, to profit from non-public knowledge of a large block pending transaction that will affect the price of the underlying security.
Thin Line between Insider Trading and Front Running
“Insider trading” and “Front running” are often used interchangeably as synonyms but, there is a distinction. When a trader places an order to trade based on information he or she has about another trader's order, the trade goes through, and the trader makes money from it, we say that the trader is “front running” the orders of other traders. This benefit could be making a profit or preventing a loss in the future. Insider trading happens when a person trade based on price-sensitive information that is not known to the public. This could be a company's good earnings, healthy financial results, dividend announcements, a new project, or a large investment. To be exact, all front running can be considered insider trading, but not all insider trading can be considered front running.
Mandatory Elements of Insider Trading
To prove any case of insider trading, one must have proved these four elements.
Inside Information: Any information which is not yet publicly disclosed and, is price-sensitive information is “inside Information”. To endorse the act of insider trading, one must prove what was the inside information.
Insider: A person who possesses inside information is an “insider”. Typically, this becomes evident upon summoning the minutes of meetings and attendance sheets of the meeting wherein it is suspected that price-sensitive information is discussed.
Insider trading: Buying or selling of the stock based on inside information and insider trading.
The Passing of inside information: How the information is passed. There should be a shred of shreds of evidence that attests that the insider possesses the inside information or if he passed that information to someone, then how it is passed (any circumstantial evidence that leads to substantial evidence).