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Insider Trading Laws In Forex Trading In The U.s.: Guidance From Mississippi Attorneys – The financial market is a wide one, and industries such as forex, cryptocurrencies, stocks, and bonds are valued in billions of dollars.
As a result, in an industry like this, there are always people who try to cheat and make a strong return. One of these ways is known as insider trading.
Insider Trading Laws In Forex Trading In The U.s.: Guidance From Mississippi Attorneys
In this article, we will explain what insider trading is, how it works, why it is illegal, and how to avoid it.
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Insider trading is defined as a situation where a person buys assets using materially important information that is not public. This information is one that could have an impact on an asset move.
A good example is where a hedge fund receives material information such as earnings before the results are released to the public.
In this case, the hedge funds will be able to position the exchanges in anticipation of the official release. If a company has strong results, the fund will open a buy position. On the other hand, if the company publishes weak results, the hedge fund will typically open a sell position.
In all, insider trading is considered wrong because it gives an advantage to a small group of people at the expense of the wider market. This happens in all industries but is most common in the stock market and cryptocurrency.
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Yes, insider trading is illegal in most countries. Regulatory agencies have created laws that prevent people from using information inside materials without following the process.
In the United States, this practice can lead to years in prison, heavy fines, and even expulsion from the financial industry.
According to the Securities and Exchange Commission, the maximum penalty for insider trading is 20 years. For an individual, the maximum fine for this fraud is $5 million while for entities such as hedge funds it is $25 million.
In addition, those who engage in insider trading may be banned from the financial market permanently or temporarily. Meanwhile, those who provide these materials may have to pay more than 1 million dollars in fines.
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Insider trading often takes many forms in the market. The most common approach is where a rogue employee works with a player in the financial industry. In this case, the employee will often provide information about the company to traders, who will use it to execute trades.
Another way in which insider trading works is where senior management of a company works with traders and investors. These entities then cooperate in a way that benefits the merchant.
Another gray area has to do with politicians. In the United States, members of the house of representatives and the senate have the right to exchange shares. The same is true for officials at the Federal Reserve.
Therefore, these people tend to have material information that could affect the financial market. For example, it was widely reported that some politicians took action in March 2020 before declaring the Covid disease a global pandemic.
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There were many cases of insider trading. One of the most famous is the case of Steve Cohen, one of the best-known hedge fund managers in the world.
He was once the top performing manager through his firm, SAC Capital. US prosecutors sued his company for insider trading and ordered him to stay away from the industry for a few years. It also paid a $1.8 billion fine to regulators.
The other good example is Raj Rajaratnam, another hedge fund manager who was sentenced to prison for about ten years for manipulating the market.
While this practice is illegal, there are several approaches that marketers use to take advantage of these activities.
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One of the best ways to use insider information legally is to check a company’s insider trading. In the United States, managers and directors are required by law to ensure that all purchases and sales of shares are reported.
Therefore, if you take the time to follow a company’s insider trading, you will be in a good position to know if a company is a good buy or not. In most cases, insiders tend to buy stocks when they believe the company is doing well and vice versa.
There are many examples of this. For example, it was reported that Silicon Valley Bank insiders dumped their stock before the bank collapsed.
There are other examples of a situation where executives sell shares before a major event. For example, the CEO and family of Ernie Garcia, the family that controls Carvanaa, sold shares worth billions of dollars before the stock collapsed.
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Another way to legally trade insider information is to use the disclosures of politicians. In the United States, politicians are required by law to make sure they publish regularly. In some periods, you can track the stocks they are buying and invest in.
However, the challenge here is that these disclosures tend to be a bit late because they have to be disclosed every quarter.
Another way to use insider information is to conduct in-depth analysis of key assets using publicly available materials.
For example, for e-commerce websites, you can use platforms like SimilarWeb to check the number of visitors to their website and people who are downloading their apps.
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The same is true for cryptocurrencies. For crypto tokens like Ethereum and Solana, you can track the activities of major players in the ecosystem using on-chain analytics.
The fact is that this practice tends to benefit a small number of people at the expense of the market. Here are some of the biggest ways insider trading affects the markets.
A good example of this is in the penny stock market, which has a large proportion of insiders. In most cases, many people have completely avoided the penny stock market in the industry.
As a result, it can lead to significant profits for a small group of people at the expense of most traders.
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Insider trading can lead to serious reputational damage. In many cases, good companies that have engaged in insider trading tend to suffer irreparable damage.
Insider trading is illegal in most countries, including the United States, Canada and Europeans. In many cases, people were forced to pay large fines and some were imprisoned for years for insider trading. As a trader, you should always avoid being caught in these activities.
For most people, it is relatively difficult to detect insider trading. One of the easiest ways to detect it is to check if they are buying or selling shares. The challenge for this is that these files tend to lag for a while.
As mentioned, it is possible to use insider trading legally. This is where you use your skills to find information that could affect a company’s actions such as insider sales.
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The World Day Trading Team does not have one person, but a group of experts (some with more than 10 years of experience) who write or supervise the quality of the articles. Do you have a different opinion than ours? We’d be happy to discuss it with you! Recent high-profile insider trading cases leave little doubt that these matters remain an enforcement priority for Washington agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ). Jones Day partners Joan McKown, Josh Sterling, and Brian Rabbitt discuss enforcement trends, proposed rule changes, and increased cooperation between federal authorities.
Recent actions by federal agencies indicate that insider trading remains a high-level enforcement priority. The SEC launched one of the first cases targeting so-called shadow trading by a corporate executive. We will tell you where it stands.
Meanwhile, the SEC lost a case that may illustrate the limits of using data analysis in proving cases to judges and juries. We’ll also talk about how Dodd-Frank expands the Commodity Futures Trading Commission, or CFTCs, to insider trading. And we’ll end the discussion with a look at how the justice department continues to cooperate with the SEC and now with the CFTC on these cases. That’s a lot to cover. So stay with us. I’m Dave Dalton, listening to JONES DAY TALKS®.
Joan McKown is a partner in Jones Day’s securities litigation and SEC enforcement practice. He has more than 30 years of experience in Securities and Exchange Commission enforcement and financial regulatory matters, including investigations, examinations, internal investigations and litigation throughout the United States. Prior to joining Jones Day, Joan was the longest serving chief counsel in the Enforcement Division of the SEC, where she played a key role in establishing enforcement policy.
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Partner in the financial markets practice, Josh Sterling has 20 years of experience with the derivatives and securities markets, both as leading counsel at large companies and as a former federal financial regulator. He represents clients active in the derivatives markets and matters before the US Commodities Futures Trading Commission, the US Securities and Exchange Commission and various self-regulatory organizations. Prior to joining Jones Day, Josh was director of the CFTC’s Market Participant Division, which oversees the agency’s 3,300 banks, intermediaries and asset managers registered for derivatives trading in the US markets.
And Brian Rabbitt is a litigator with extensive experience in handling complex litigation and sensitive investigations.
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