Insider Trading in the Digital Age – Secrets travel faster than the Law?

What is Insider Trading?

Turning whispers into wallets – some call it genius, others call it illegal.

In simple terms, Insider Trading refers to trading done on the basis of Unpublished Price Sensitive Information (“UPSI”). Not simple enough? Let me simplify further.

At its core, Insider Trading happens when someone trades in a company’s shares based on material information which hasn't been made available in the public domain. This means trading is done basis secret knowledge.

Imagine you overheard a friend’s telephonic conversation about a huge deal at their company – a deal that could potentially double the stock price overnight. You know acting on it is unfair. But the temptation to use that tiny piece of privileged information to essentially make a fortune is enormous. Welcome to the world of Insider Trading, now turbocharged by the digital age.

Today, the landscape has changed, the digital era of social media and online forums makes sharing information almost instantaneous where a secret can travel hundreds of miles in milliseconds, creating opportunities for unfair advantage to some and unfair disadvantage to many.

The Digital Era – Whatsapp leaks, Trading algorithms and much more!

Information exchanges on Whatsapp, call records and use of trading algorithms to master the system and gain unfair profits have become a prominent phenomenon now more than ever. It is not unusual for Securities and Exchange Board of India ("SEBI") to issue show-cause notices regularly to individuals accused of sharing sensitive market information online or by phone.

Many if not most fraudsters are highly intelligent people and they are experts at gaming the system. They have adapted quickly to the modern age era of digitalisation to efficiently make profits through fraudulent methods. Some ways through which the digital platforms are being exploited for such illegal means are –

i) Whatsapp Tips & Private Groups

Such groups enable traders receive and share stock tips with employees in private chats before such information becomes public giving them the advantage of trading using UPSI to make unfair gains or avoid unfair losses.

ii) Algorithmic Trading & AI

The use of algorithms and Artificial Intelligence (“AI”) to process information on news channels, social media and financial disclosures faster than any human enable Insider Trading as it gives unfair advantage to such users.

iii) Cybersecurity breaches

Hacking of emails or leaking of sensitive documents can be exploited for profit, facilitating Insider Trading without direct insider involvement.

Therefore, it can be inferred that the digital era has amplified both, the speed and reach of Insider Trading, making it harder for regulators to detect and punish the mastermind behind such scams.

Legal Perspective

In India, SEBI regulates the market and treats Insider Trading as a serious violation under the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 2015 ("SEBI (PIT) Regulations, 2015"). Insider Trading is not just a breach of law but also a breach of trust of the millions of investors.

SEBI (PIT) Regulations, 2015 provide the core framework for governing Insider Trading in India. It defines important terms such as UPSI, Insiders, Connected Persons, Designated Persons, and penalties. With the growing dependency on digitalisation, this Act also emphasises digital trails, emails, Whatsapp chats, etc as potential evidence.

Section 15 G of SEBI Act, 1992 provides for penalties for Insider Trading.

Relevant Extract is as follows:

“Penalty for insider trading. 15G.

If any insider who, —

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or 

(ii) communicates any unpublished price-sensitive information to any person, with  or without his request for such information except as required in the ordinary course of business or under any law; or 

(iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty

[which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher].”

Regulatory Authorities’ take on Insider Trading

Courts and SEBI have clarified repeatedly that “knowledge is power but misused knowledge is a crime”. It is pertinent to note that while the digital era has been significantly misused by certain individuals, it has also helped regulatory authorities by acting as a tracker.

In the matter of Insider Trading in the scrip of Infosys, SEBI established individuals as ‘connected persons’ through their LinkedIn connections and activity (including recommendation given to a former colleague). Other factors considered included call data records, commonality in the reporting authority of persons etc.

Therefore, when used wisely, the digital era can truly enrich our lives, and we should appreciate how it helps our communities progress.

Why it matters to you?

Insider Trading affects not only the traders but also the market intermediaries. It affects the Investor confidence as it created a persona of rigged market leading to hesitation to invest. Market fairness and following ethical standards is paramount to ensure no innocent investor loses faith in the securities market. Ethics aren’t just paper rules, but they are the glue that holds the markets together, and essentially the economy of the Country.

Closing thought

While the digital era is here to make us faster, smarter and more connected – it’s misuse can lead to some serious damage. The boon of the digital era comes with raised stakes for fairness. In the end, it’s a moral question - In a world where information travels at the speed of light, doing the right thing is slower than the temptation, but infinitely more valuable.

Afterall, when secrets go online, trust goes offline.