Who are insiders and should you follow their trades?

Who are insiders

Imagine a situation: there is a fast-growing startup whose shares have risen in price ten times over the past year. But then the financial report comes out, and it turns out that the company is going bankrupt, nothing good awaits it. Stocks naturally plummet. And suddenly it turns out that the financial director on the eve of the publication of the report managed to sell his securities at the peak and earn a large amount. Luck? It is unlikely, because he read the document before its publication and knew what the financial results would turn out to be for the organization. He had an advantage over the rest of the current and potential shareholders.

Insiders are just such people who have access to inside information about securities and factors that may affect their value. The full list of such persons is quite long, it is in a special lawFederal Law No. 224-FZ dated July 27, 2010 “On Counteracting the Misuse of Insider Information information and market manipulation and on amendments to certain legislative acts of the Russian Federations"

. Specifically, insiders include:

• representatives of the company that issues shares;
• members of the board of directors;
• professional bidders;
• representatives of authorities;
• agencies that publish reports.

The list of what is insider information is in the directionBank of Russia Ordinance No. 5326-U, dated November 21, 2019, “On the List of Insider Information of Legal Entities Specified in Clauses 1, 3, 4, 11 and 12 Article 4 of the Federal Law of July 27, 2010 N 224-FZ "On countering the misuse of insider information and market manipulation and on amendments to certain legislative acts of the Russian Federation”, as well as on the procedure and terms for its disclosures»» Central Bank. This, for example, data on the liquidation or reorganization of the company, errors that crept into the financial report, concluded and lost contracts, and so on.

Once information becomes public knowledge, it ceases to be insider information.

Further, it matters who gets to it earlier and who analyzes it better. Forecasts and comments are no longer insider information.

Can insiders trade stocks?

If a person constantly learns about some events before others, this gives him a huge advantage. From the outside it looks dishonest: he is always one step ahead of the rest and can earn money on it.

Therefore, it is prohibited to use insider information for transactions with financial instruments. in RussiaFederal Law No. 224-FZ dated July 27, 2010 “On Counteracting the Misuse of Insider Information information and market manipulation and on amendments to certain legislative acts of the Russian Federations" and many other countries. At the same time, knowledgeable people do not necessarily act on their own. They can transfer data to a client, a brother, a matchmaker, or someone else. And he will already benefit from them and, possibly, share money with the insider. You can't do that either.

At the same time, it is important to understand that in general, insiders can sell and buy securities. on the exchange, including the company whose affairs they are aware of. But not always. For such people, there are periods closed for transactions when they cannot trade in the shares of “their” organization.

For example, here insider calendarInformation on the closed period for insider transactions with financial instruments / Rosneft Rosneft. Red marks the days when investors cannot make deals with the shares of this company. Securities of other issuers, in relation to which they are not insiders, can be disposed of.

What happens if an insider breaks the law

In general, for this purpose in the Criminal Code there is a separate chapterCriminal Code of the Russian Federation, article 185.6 "Misuse of insider information", which involves punishment in the form of a fine of up to a million rubles, forced labor and even imprisonment. This applies to cases where the damage, loss or income from transactions using insider information exceeded 3.75 million. But the article is used extremely rarely.

Insider trading is monitored by the Central Bank. He reports violations on his siteIdentified cases of misuse of insider information and market manipulation / Central Bank. The Central Bank may transfer information to the police for further investigation. But cases of misuse of insider data are found less often.

So, the last one is mentioned on June 27, 2019. The Central Bank revealed the sale of Transaero shares using insider information at the end of 2016. Then the co-owner of the airline hid that he got rid of almost 64 million of his shares. The buyer was his mother, who subsequently also sold the securities. According to the Central Bank, if information about trading in shares was public, they would fall sharply in price. And hiding data helped relatives avoid losses of more than 200 million rubles. As follows from the message of the Central Bank, the materials were transferred to law enforcement agencies.

In the USA, for example, the dynamics are completely anotherReports and Publications / The United States Securities and Exchange Commission. In 2020, 33 cases of insider trading were recorded there, in 2021 - 28. But in that country and culture investment pumped much more seriously.

Is it worth watching insider trading?

Let's assume that all investors are very law-abiding and never use insider information. Even so, you can watch their behavior in the stock market, because they are in the thick of things. Given that the initial assumption is very idealistic, it is highly desirable to do so.

But this does not mean that you need to duplicate the behavior of the insider. Firstly, it is impossible to know for sure whether he is driven by classified information or whether he makes a specific decision based on something dubious. He can afford to risk some amount if he has a lot of money.

In addition, insiders may deliberately take certain actions, knowing that this will affect the price of shares. For example, if members of the board of directors start to sell securities, their prices may fall because of this: obviously they know something. And then an interested person will come and buy everything on the cheap. So it's also important not to fall into the trap. (By the way, market manipulation is also forbiddenFederal Law No. 224-FZ dated July 27, 2010 “On Counteracting the Misuse of Insider Information information and market manipulation and on amendments to certain legislative acts of the Russian Federations".)

In general, following insider trades is an optional activity. You can do it, but not thoughtlessly. At the same time, attention should be paid to buying, not selling. Buy stocks usually in the hope that they will rise in price. And sales from company employees may mean nothing - suddenly they were given a bonus yesterday in shares and people are getting rid of them.

Another question is where to get such information. Fortunately, insiders are required to report transactions in securities - only those in relation to which they are insiders, of course.

Messages about Russian companies can be found, for example, on information disclosure server Interfax. Inside, the necessary data will already have to be searched. The easiest way to do this is to use keywords like "changing the size of the participation share." US insiders are often watched on special services like Finviz, GuruFocus.