Insider Trading Explained: Where Research Ends and the Law Begins

Insider trading means buying or selling shares while you hold precise information that is not yet public and would probably move the price once it came out. In the Netherlands it is banned under the EU Market Abuse Regulation and supervised by the AFM. The line has nothing to do with how clever your analysis is. It is about where your information came from, and whether everyone else could have had it too.

What is insider trading, exactly?

The Market Abuse Regulation (MAR) has applied across the EU since July 2016, so the same rules hold on Euronext Amsterdam as in Paris or Milan. It gives inside information four features. It is precise: it points to a fact or an event, not a mood. It has not been made public. It concerns a listed company or its shares. And a reasonable investor would be likely to use it when deciding to buy or sell, which is a polite way of saying it would move the price.

The regulation then forbids three behaviours:

• Insider dealing: trading on inside information, including cancelling or changing an order you had already placed.
• Unlawful disclosure: passing the information on outside the normal course of your work.
• Recommending or inducing: telling someone to buy or sell because of what you know, even if you never say why.

Directors and employees are the obvious insiders, but the rules reach much further. A lawyer drafting a takeover, a printer handling a results release, a partner who overhears a call at the kitchen table: anyone who knows, or ought to know, that the information is inside information is covered.

Why insider trading is illegal

A share price is a shared estimate. Thousands of buyers and sellers agree on it, one trade at a time, and that only works while they believe the game is fair. When one side of a trade already knows the answer, the other side pays for it, usually a pension fund or a private investor with no idea what is coming.

There is an economic cost as well. If outsiders expect to be picked off, they demand a discount for the risk, and companies pay more to raise capital. Bhattacharya and Daouk studied this across dozens of countries and found that the cost of equity fell not when insider trading laws were passed, but when they were first enforced. Rules on paper did little. Prosecutions changed behaviour.

In the Netherlands the AFM can impose administrative fines and publish them, and serious cases can be prosecuted as criminal offences. EU rules require prison to be a possible sentence for serious insider dealing. Most price moves come from news that everyone can see, which is why how public news moves share prices is a far better edge to study than any whisper.

How regulators detect insider trading

People imagine wiretaps and car park meetings. Most cases begin with data.

1. Suspicious order reports. Banks, brokers and trading venues must run systems that flag possible market abuse and report it. In the Netherlands those reports go to the AFM.
2. Timing. When a takeover is announced, investigators look back at the days before it. A first-ever purchase of options in a quiet stock, a week before a bid, is hard to explain.
3. Insider lists. Listed companies must keep a dated list of everyone with access to inside information. Those names can be matched against trading records.
4. Connections. Investigators then map family ties, shared addresses and messages between the people on the list and the people who traded.
5. Managers’ own trades. Directors must report their dealings, and the AFM publishes these notifications in a public register. They are also barred from trading during the 30 days before interim and annual results.

What sinks most cases is small and human: a trade that is too large, too early and too unusual for the person who made it.

Research or inside information: where is the line?

Good investors try to know more than the market, and that is allowed. What matters is the source. EU rules state that research and estimates built from public data are not inside information, even when they turn out to be spot on.

The practical test is simple. Could the market have known this? Would a reasonable investor use it? Did you know, or should you have known, where it came from? If you would rather not explain the trade to a stranger, you probably know the answer already.

How WallThrone turns insider trading into a risk mechanic

Few people will ever be offered a real tip worth going to prison for. A game can let you feel the temptation safely and watch what it does to your judgement.

The market is a single shared exchange, the WSX, with fictional companies and prices from the game’s own model. Three informants sell an edge. The Broker sells tips that are not always right. The Fixer offers private placements that come back multiplied, or not, in half an hour. The Insider knows what is going to happen, and using that knowledge is illegal.

Every illegal move raises your Heat, on a scale from 0 to 100, and the Commission, the game’s regulator, answers in stages:

• At 30, a letter.
• At 50, an inspector.
• At 70, a raid.
• At 90, a trial, and possibly prison.

Heat falls over time, and faster with compliance staff on your team. Prison is the part that teaches. You cannot trade from a cell, yet prices keep moving every five seconds and your rivals keep climbing the ranking. Choices in calls and messages also shift your karma between Light, Balance and Dark, and your decisions lead to one of three endings.

The real world is less forgiving. There is no Heat bar to watch, no warning at 30 and no credits that buy an early release.

Staying clear of insider trading as a private investor

• If someone at a listed company tells you something specific before it is announced, do not trade and do not pass it on.
• Be careful with your employer’s shares. Many companies add internal dealing rules on top of the law.
• Write down why you bought. A record of public reasons is useful if anyone ever asks.
• Treat a tip that sounds certain as a warning sign, not an opportunity. Certainty is exactly what the biases behind bad trading decisions feed on.

The AFM is the authority on these rules in the Netherlands, and its own guidance on market abuse is the place to check any specific case.

Frequently asked questions

WallThrone is a game played with play money on a fictional exchange; it is not a broker and gives no access to real markets. This article explains general rules for education only and is not legal or financial advice.