Insider Trading Explained (PDF)

Did you hear? Axi was in the spotlight with our bid to acquireSelfWealth, an investment firm listed on the ASX. This is a good time to refresh our knowledge of insidertrading and its potential impact! Insider trading involves trading an instrument basedon material, non-public information. This p...

Did you hear? Axi was in the spotlight with our bid to acquireSelfWealth, an investment firm listed on the ASX. This is a good time to refresh our knowledge of insidertrading and its potential impact! Insider trading involves trading an instrument basedon material, non-public information. This practice is unethical as it undermines marketfairness and investor trust. Axi is a global brand and insider trading is illegalin all jurisdictions in which we operate. Engaging in insider trading can lead to criminalcharges. Insider trading rules are similar across regions,so we\'ll use the UK Market Abuse Regulation (MAR) as a guide to prevent it. MAR specifies behaviours that constitute insider dealing,which we must avoid at Axi. One example of insider trading is front running, wherea person trades securities based on inside information about a pending order. Front running often occurs in takeover situations,similar to Axi\'s bid for SelfWealth. This includes using confidential bid details for personalgain and making trades that take advantage of expected share price movements. These confidential details are seen as inside information. In takeover situations, they include potential bidsor due diligence results. Using this information properly is key to not engagein insider trading. Examples of insider trading include a director sharingconfidential takeover information with a friend, who then trades based on this knowledge. Let\'s see how this situation unfolds. Xenox, a director at Bell PLC has lunch with a friend,Yvonne. Xenox tells Yvonne that his company has receiveda takeover offer that is at a premium to the current share price at which it is trading. Yvonne enters into a CFD position priced by referenceto the share price of Bell PLC, based on her expectation that the price in Bell PLC will increase once thetakeover offer is announced. Although this scenario seems clear-cut, insider tradingcan occur in various ways. The allure of large profits and personal benefitsoften tempts individuals. Sometimes they might not even realise their actionsqualify as insider trading. Yvonne informed Jared, an employee at Bell PLC, thatBell PLC has just lost a significant contract with its main customer. Before the information is announced over the regulatoryinformation service, Jared, whilst being under no obligation to do so, sells his shares in Bell PLCbased on the information about the loss of the contract. It\'s important to note that you don\'t need to makea profit to be prosecuted for insider trading. Whether you make a profit or loss, insider tradingstill constitutes a criminal offence. Let\'s move to some other examples relating to commodityderivatives. Commodity derivatives are financial instruments thatallow investors to profit from commodities without owning them, such as a CFD, futures or option contracton a commodity. Before the official publication of the London MetalExchange stock levels, Xenox learns from Yvonne who works at the LME, that there has been a significantdecrease in the level of LME aluminium stocks. This information is reasonably expected to be disclosedin accordance with market practice on the LME. Xenox buys a substantial number of futures in thatmetal on the LME based upon his knowledge of the significant decrease in aluminium stock levels. As you can see, inside information isn\'t just forshares; it applies to any trades made with insider knowledge, even with metals or commodities like oil. Yvonne started work as a dealer on the trading deskof Bell PLC, dealing in oil derivatives. She accepts a very large order from a client to acquirea long position in oil futures deliverable in January. Before executing the order, Yvonne trades for thefirm and on her personal account by taking a long position in those oil futures. This is based on the expectation that she will beable to sell them at profit due to the significant price increase that will result from the executionof her client\'s order. Now there are scenarios where you can act on insideinformation without it being considered insider trading. In merger or takeover activities, using inside informationsolely for proceeding with the transaction is not insider trading. Examples of using insider knowledge for a mergeror public takeover might involve: Getting commitments from security holders of the targetto accept or reject an offer to buy those securities. Setting up deals for issuing securities as part ofthe takeover or merger, including any necessary underwriting or risk management. Or: Offering cash as an option for the takeover or mergerinstead of securities. By combining trading data with other data sources,regulators can identify traders, networks of connected parties and analyse trading patterns. In the UK, the maximum sentence for insider tradingis ten years in prison. While in Australia, if you\'re convicted of insidertrading, you could face up to 15 years in prison, a fine of up to \$1.565 million, or three times theprofits made or losses avoided, whichever is higher. Australia\'s most infamous insider trading case involvesChris Hill and Lukas Kamay. Did you know Axi helped uncover and report this case? Dubbed the perfect crime, it even inspired the podcast,the Sure Thing. Chris, while working at the Australian Bureau of Statistics,gained access to key economic indicators. At a friend\'s birthday party, he met Lukas, who workedat the National Australia Bank on the foreign exchange desk. Lukas suggested using ABS data for insider tradingon the Australian dollar. Lukas then opened a forex account with Pepperstone,and Chris leaked confidential ABS data, which Lukas used in the forex derivatives market to earn hugeprofits. Lukas made his first trade on the Aussie dollar usingABS data, resulting in \$13,508 profit for their joint account. Secretly, he opened another account, using the samedata to gain \$7,700. By 2013, Lukas got bolder, earning nearly \$61,000in under three minutes with a \$29 million exposure to the Aussie dollar. By January 2014, Lukas opened another secret accountwith Axi. By February 2014, weak unemployment data pushed theAustralian dollar down, and Lukas made \$1 million in eight minutes. Pepperstone notified ASIC of potential insider trading. And Axi contacted ASIC with similar concerns. ASIC and the Australian Federal Police initiated ajoint investigation called Operation Leith. In March 2015, Lukas received the longest insidertrading sentence in Australian history, seven years and three months. While Chris was sentenced to three years and threemonths. This podcast is available on Apple and Spotify ifyou\'re interested in the full story. That\'s all for today, thank you for watching thisvideo. If you have any further questions or need additionalresources, please don\'t hesitate to contact our compliance team. Have a great day, and stay compliant!