Posted in Anti-Money Laundering (AML), Counter-Terrorist Financing, Markets Compliance on October 25, 2023
The market abuse and insider trading are one of the types of financial crime. Criminals or insider traders manipulate the market rules and regulations and gain secret information from within the entity, using their power of position to generate personal financial benefit.
Market Abuse and Insider Trading
Market abuse or manipulation is the process by which a market for securities is manipulated either upwards or downwards by a person seeking to make it appear that securities are worth either more or less than their true value.
The simplest example of market manipulation would be for the issuer of securities to give money to several people it controls so that those people will acquire those securities and make it appear that there is a market for them. Basic economic theory tells us that if there is high demand for an asset, its market value will increase.
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Insider trading is illegal, and organizations must implement appropriate policies and processes to ensure that employees of the company are not involved in insider trading. In addition, there is a separate definition of “inside information” about commodity derivatives and emission allowances or auctioned products based on them.
The inside information is the information which:
- Is precise;
- Has not been made public;
- Relates directly or indirectly to the company’s shares or other financial instruments;
- If it were to be made public, it would likely have a significant effect on the price.
An insider may be a person or persons charged with executing orders concerning financial instruments, receiving information conveyed by a client, and relating to the client’s pending orders in financial instruments. Under point (d) of Article 7(1) of the MAR, inside information directly or indirectly relates to one or more issuers or financial instruments.
If it were made public, it would likely have a significant effect on the prices of those financial instruments and the cost of related spot commodity contracts. Also, where this information is reasonably expected to be disclosed or is required to be disclosed following legal or regulatory provisions at the European Union or national level, market rules, contracts, practices, or customs, on the relevant commodity derivatives markets or spot markets.
Market abuse is the use of illegal means or violations of market rules and regulations to gain personal advantage. Criminals use insider trading or market abuse methods to perform financial crimes.
The insider may have a piece of precise information, which means the information that concerns:
- A set of circ*mstances that exist or which may reasonably be expected to come into existence; or
- An event that has occurred or which may reasonably be expected to occur;
- Where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circ*mstances or event on the prices of financial instruments or the related derivative financial instrument, the related spot commodity contracts, or the auctioned products based on emission allowances.
Final Thoughts
Insider dealing, unlawful disclosure of inside information, and market manipulation are all examples of market abuse. Insider trading is the deliberate exploitation of confidential information obtained through a privileged relationship or position within an entity in order to profit from trading in shares.
