I want to see how CFA Charterhold view this. I am a charterholder myself.
Much of the media coverage on insider trading is very clear cut. There was advanced information for a particular security and the individual acted upon by trading the security or derivatives directly related to the security.
However, how do the SEC or other organization ever catch the smarter investors who do use insider information. There are many examples but here are two simple ones (there are many more ways to be creative here).
An individual know there’s a merger for the Royal Dutch Shell BG, the dumb inside trader will go and buy the underlying shares. The smart insider trader can buy into the ETF which tracks oil companies or something else indirectly related.
An insider knows that there’s a negative news earning for a particular company which will affect the market. He/she can go and buy VIX indices or short related companies around the world.
There are many more examples but as long as the insider trades smartly, how can he/she ever be caught? Perhaps SEC and other regulators know about it but can’t do anything and just focus on the dumb inside traders.
Thats the reality of the markets you can never completely eliminate Insider trading. The big funds will spend lot of $$$ and get tip’s from insiders and trade on that information. SEC knows about it and cant do anything. They will catch the ocassional Joe Bloke but that;s about it.
How does the SEC do it? That’s their secret. I can tell you that they have very powerful computers to tie trading activity to news, derivatives, and the like. You want to avoid getting caught? Don’t be greedy.
your examples sound just something that i’ve seen on a question from either the curriculum providers or 3rd party material. It would not be considered insider trading if you invest in ETF or some mutual fund that tracks a particular industry. The reason is because you are not investing directly in the company.
Let me give you an example: you know that company A has a really super cool medication that they wanna get out on the market. If it’s inside knowledge, you can’t trade or act on it. So you think you could just invest in the pharma industry. Well, guess what will happen if you do that? The stock of the company will go up, but it will affect the competitiveness of other companies in the same industry, potentially leading to no overall impact for the industry sector.