What is Insider Trading and why is it illegal ?

 

There are many types of illegal transactions, and many personalities, from politicians to ordinary people, can participate in these transactions. One of these types of transactions is called   Insider Trading   , and history is replete with examples in which government figures have been jailed for doing so; but what is covert trading and why is it illegal? To learn more about Insider Tradings, understand the reasons why they are illegal learn how to trade coverts in the cryptocurrency market, and learn about examples of such transactions, stay tuned with us on Coinmarketsig.com.

 

What are Insider Trading ?

Insider Tradings refer to the act of buying and selling shares of a state-owned company or its securities, which are basically based on non-public information about that company. In many countries, certain forms of transaction, which are mainly based on the disclosure of a company’s internal information, are considered illegal. However, there are other forms of domestic transactions that are considered legal. Insider Tradings have now spread to digital currencies, and various individuals are buying and selling cryptocurrencies using project information that is not made public.

It is not possible to make a profit in trading unless one can identify market trends, which even then is limited to people predicting the performance of corporate stocks. The only way to be completely sure is to get private information from someone inside the company that has not been made public. When this private information is used to trade an asset in the market, this phenomenon is called covert trading.

 

Who is the trading insider?

To understand the legal implications of being a Trading Insider and engaging in Insider Tradings, you need to know who the Trading Insider is. A person can be classified as a Trading Insider in two ways.

The first method, which is better known, is when a person has access to sensitive non-public information about a company; this person is called a Trading Insider. Whether someone else told this information to the person or he/she found out about it, in any case, this person is called a Trading Insider.

The second method is when a person owns more than 10% of a company’s shares. In this way, the company’s managers and other high-level managers of the company become internal revealers.

 

Which parties are involved in Insider Tradings?

Insider Tradings, like any other transaction, require more than one party, because it is an information transaction. Institutions involved in Insider Tradings can be divided into three categories, and these institutions sometimes overlap:

There is a company whose information has been compromised. The company’s securities, information data or any other asset is what is traded by the internal disclosure. An internal disclosure holds confidential information that others can use to their advantage. They are also the ones who disclose the confidential information they have.

There is a person for whom the information has been disclosed and if the transaction is made, this information will be used for investment. Thus, the third category usually includes a number of investors. These people are interested in the confidential information that the Trading Insider has.

In addition, sometimes the Trading Insider who has the information uses this information to buy shares and make a personal profit, so the second and third person can be one person at the same time.

Types of Insider Tradings

As mentioned earlier, Insider Tradings can be both law-abiding and law-abiding. These are known as two types of Insider Tradings, although the more common type is illegal. The following are legal and illegal Insider Tradings:

Legal Insider Tradings

Legal Insider Tradings occur when the second type of Trading Insider (someone who owns more than 10% of the company’s stock) trades. This type of trading is quite common and is done weekly in the stock market. As long as the managers or officials of the company report their transactions to the Securities and Exchange Commission, their activity is legal. These reports include stock disclosures, their transactions, and any changes in stock ownership.

These Insider Tradings are considered legal when the CEO of any company or institution repurchases shares in his company, or when other employees acquire shares in the same company in which they work. The purchase of shares by the CEO may often affect stock price fluctuations; For example, the business of Warren Buffett, a well-known American capitalist who trades shares in Berkshire Hathaway subsidiaries, is an example of legal Insider Tradings.

Illegal Insider Tradings

When some of the important information of the company has not been made public yet and people are trading the shares of that company, the secret transactions are considered illegal and result in severe penalties such as heavy fines and imprisonment. Any data that may have a significant impact on the value of the company’s stock is considered important information.

Obviously, access to such knowledge may influence the investor’s choice to buy or sell shares and give them an advantage over the public, which is unfair under the rules of the Securities and Exchange Commission and therefore illegal; For example, ImClone transactions by Martha Stewart, an American businessman and author in 2001, are excellent examples of clandestine illegal transactions.

Why is Insider trading illegal?

According to the US Securities and Exchange Commission (SEC), a type of Insider Trading that is considered illegal is the purchase or sale of securities as opposed to a fiduciary duty or other relationship of trust, based on material and non-public information about securities. Is.

It is quite clear that Insider Tradings are illegal because they provide some very unfair benefits to others. This process allows the Trading Insider to artificially affect the value of the company’s stock.

Obviously, the reason for Insider Tradings being considered illegitimate or illegal is that it unfairly gives the domestic whistleblower an advantage in the stock market. It also puts the interests of the Trading Insider above those of those to whom the Trading Insider owes a particular fiduciary duty, and allows the Trading Insider to influence the value of a company’s stock price.

How do Insider Tradings affect digital currencies?

As the value of bitcoin and atrium has risen sharply in recent months, the decentralized digital currency market has seen a dramatic rise in new traders, especially stock traders and forex traders, who have moved to the digital currency market in hopes of making a profit. More Insider Tradings are possible in the field of Defi and in decentralized exchanges.

With the new influx of traders, some of the common day trading methods used in stock markets, such as buying tactics with broken resistance levels and scalping, have also entered the digital currency market, which is generally not a cause for concern. However, one particular strategy in the cryptocurrency market that has become popular among day traders is called Front Running, also known as tailgating. The reason for front-runners being bad is that these front-runners exploit digital currency exchanges through Atrium traders’ network of transactions, attracting large sums of money up to hundreds of millions of dollars.

What does front running mean?

On the Front Running Stock Exchange, it is said that people who are aware of a stock’s confidential information order a stock before it opens. In traditional markets, this usually happens when Front Runner realizes that a big deal is on the way. The word Front Running is derived from such transactions and stock exchanges.

In the digital currency market, when a trader makes the most of important information from an Trading Insider  or undercover information about a future transaction that is to have a significant impact on the price of a particular digital currency, this is called front-run.

Front-runners basically buy or sell a digital currency based on data and information that is not publicly available to traders and that affects the price of digital currencies. In this way, Front Runner is superior not only to other traders but to the market as a whole, because the information they use to make their own decisions is not public. That is why Front Running is a kind of market manipulation and has the characteristics of covert trading.

How does Front Running happen in digital currency exchanges?

In the world of digital currencies, the concept of front-ending is similar to the stock market, but with a different approach. Robots, which are computer programs, are used to automate transactions in the digital currency industry to make trading easier. Front-running robots in the tailgating scenario automatically combine and evaluate market information and perform front-run for investors. These robots are used in decentralized exchanges and front-run attacks usually occur in these exchanges.

Users who use the Front Running technique use the robots to bypass the queue and receive a higher transaction fee to place an order. The trader who started the trade has no choice but to pay the price he did not expect, and this amount reaches the front runner and the trader suffers a loss.

For example, if a FrontRunner trader in a digital currency knows that a person who is primarily an investor, company, or moneychanger is going to buy a $15 million digital currency, the FrontRuner robot may place a purchase order just before that person. Therefore, when a $15 million digital currency is bought, the robot immediately places an order and allows Front Runner to make a huge profit.

An example of Insider Tradings in cryptocurrency market

The stock market is not the only trading platform involved in illegal covert trading. Similar cases of front running have been observed in digital currency transactions. The following is an example of illegal transactions in the digital currency market:

Nate Chastain

In September 2021, an angry Internet group of pixelated cartoon characters and monkey avatars attacked a 31-year-old Brooklyn man named Nate Chastain. They claimed that Nate Chastain had used immoral techniques to obtain digital art cheaply and sell it at a high price.

Chastain is one of the top executives of the largest non-exchangeable token exchange (NFT) in the world. He was accused of abusing the same market that he oversaw in the field of digital art and was protected in the blockchain. Following the controversy, Chastain has not had a steady job until recently and has faced a variety of legal issues.

How did Chastain get his hands on it?

Zuwu, a Twitter and OpenSea user, found that the blockchain data, which shows all transactions, indicates that the wallet associated with Chastain Avatar bought various NFTs shortly before they were advertised on the OpenSea homepage. He then sells them at the usual price increase. Zoo’s tweet went viral on Twitter shortly after its release to the NFT fan world, where Chastain was known as an active and kind player. OpenSea almost confirmed Chastain’s violation in the following hours, calling it very upsetting. Chastain seemed to step down a few days later and change his Twitter account to past: @opensea.

What happened to Chastain?

Chastain resigned as head of OpenSea.io, an online auction gallery for NFT, on Thursday. OpenSea, the largest platform for the unique tokens market, has seen an increase in sales of art-themed NFTs this year, reaching $1 billion in commercial activity; If anyone wants to pay $18,000 or more for a dull monkey image to use as an avatar on Twitter, OpenSea is the place to go.

No law enforcement agency has accused Chastain of any wrongdoing, and he has made no public attempt to explain what happened. However, he may at least have legal problems. While the SEC has not yet decided whether NFTs are eligible as securities under the 1933 Act, Gensler may try to argue that the act is a fraud in securities and file a civil lawsuit against him. . Even if the SEC decides not to pursue the matter, other federal officials may be interested in investigating Chastain’s case.

How can Front Running be prevented?

The attractiveness of Front Running lies in its high profit margin when making big trades. Instead of doing many big transactions at the same time, users can split their transactions. This reduces the attractiveness of decentralized exchanges for front-runner robots.

Investors, on the other hand, can use Telos EVM, a scalable solution for Solidarity-based applications built with the goal of transforming Defy. Telos EVM, a Layer 1 chain that is fully compatible with the Atrium Virtual Machine (EVM), can deal with issues such as front-run in the digital currency market and other issues such as high prices and low transaction speeds that affect the Atrium network on a regular basis. Gives, confront.

In Conclusion

While covert trading remains a clear threat to the stock market, its existence in the world of digital currencies and in decentralized exchanges is less well known and has not yet been legally addressed. Perhaps this is due to the new digital currency market, security and decentralization provided by blockchain. In any case, Insider Tradings can contaminate any market in which trading is possible.