What makes information "inside"?
Two criteria must both be met: the information must be material (meaning it would likely affect an investor's decision to buy or sell — earnings surprises, merger announcements, major contract wins, regulatory decisions) and non-public (not yet released to the market). The moment a company announces its merger to the market, trading on that information becomes legal. Before the announcement, it's insider trading — for executives, employees, and anyone else who received a tip.
| Legal trading | Illegal insider trading |
|---|---|
| Trading on published earnings | Trading on earnings before release |
| Acting on analyst reports | Trading on merger news before announcement |
| Using publicly available information | Trading on a CEO tip passed to a friend |
| CEO trading after lock-up on a preset plan | Leaking information to family and letting them trade |
The "tippee" problem
One of the most misunderstood aspects of insider trading law is that it extends beyond the insider themselves. If a CFO tells her brother that the company is about to be acquired, and her brother trades, both can face criminal prosecution — the CFO as the "tipper" and the brother as the "tippee." This chain can extend further: if the brother tells a friend who also trades, that friend may also be liable. Proximity to the original source doesn't wash away the violation.
Why it matters for market integrity
Markets function on trust — specifically the belief that prices reflect publicly available information and that all participants compete on equal terms. Insider trading breaks that social contract. It shifts wealth from ordinary investors to those with privileged access. Over time, if unchecked, it would cause rational investors to exit markets entirely, knowing the game is rigged. Most developed countries therefore treat it as a serious criminal offence with substantial prison sentences.
"Insider trading involves stealing information — and the people it hurts most are ordinary investors who trusted the market was fair." — SEC enforcement logic
What this means for you
As an ordinary investor, insider trading laws largely protect you. But if you work at a company, or receive tips from people who do, be aware: the law reaches further than most people assume. Using a friend's non-public information about their employer's acquisition to buy options is not a grey area — it's a crime. Most large companies have explicit blackout periods and compliance procedures precisely to prevent accidental violations.