Companies have trading policies for insiders (anyone who possesses non-public information about a company — directors, stakeholders, and so on). These policies often include a trading window. These trading windows enforce when an insider can trade the company’s stock. This timeframe is generally 6 weeks for the majority of publicly traded companies.
The trading window is not a hard-and-fast rule. Though insider trade is prohibited beyond the window, there’s no well-defined structure to it. For example:
- Different firms have different trading windows.
- It’s not generally made known why a particular trading window was chosen.
- There count be intermittent “blackout” periods within the trading window when insider trading is prohibited.
- There’s no legally-mandated minimum limit or maximum cap on the period to be allotted for insider trading.
Insider trading policies help keep things organized, fair, and legal. Generally, firms begin the trading window for insiders a few days after the release of a quarter’s earnings and close it nearly a couple of weeks before the next quarter ends.
In general, companies have a window of time where executive officers can buy and sell stock based on information they learn before it becomes public. The Securities and Exchange Commission (SEC) has set the maximum amount of time that insiders can trade in the company’s stock at 15 days. The length of this period depends on how much time it takes to complete the transaction, from when an insider learns about a material event until it becomes public.
The topic falls under securities enforcement, materiality, and in some cases, market asymmetry and is incidentally a topic worth researching in depth to avoid legal and regulatory issues.
How Do Boards Decide the Trading Window for Insiders?
Public companies typically grant executives access to their personal brokerage accounts for any transactions made during business hours. While this privilege may seem like an easy way for executives to profit off information that they receive during board meetings or other board-related events, there are strict rules governing who can trade stocks while they’re allocated between different employers.
For example, many companies require that all transactions be approved by a member of senior management or an independent auditor before being executed.
The length of the trading window depends on the type of information being made public, how much time it takes for information to be processed through various channels, and how quickly executives react to it when they learn about it.
The length of the trading window also varies based on whether an executive’s knowledge is based on inside information or not. For example, if you are a stockbroker and have been tipped off by your client that his company will announce a large acquisition in two weeks, then you’ll have 30 days within which to buy shares before everyone else learns about this news. But if your client was told that he would receive a bonus at year-end, then you’ll have only five days within which to buy shares before everyone else knows about this impending bonus payout for him or her.
Please note that the above numbers are suggestive only and can vary from industry to industry and from region to region.
When Do Companies Begin and End Insider Trading Windows?
The length of these windows can vary from company to company, but they typically last between 3-7 weeks.
Insider trading windows are typically classified into two types: ad hoc blackout periods, which are temporary windows where insiders cannot trade based on information they have obtained, and permanent windows, which allow insiders to trade on their own knowledge of upcoming transactions.
In most cases, insider trading is not illegal per se, but it can be considered insider trading if someone buys or sells stock after receiving confidential information about a pending announcement.
Companies begin and end insider trading windows when they issue earnings reports. The length of the window depends on many factors, including whether the company has a lockup period or is subject to a blackout period.
The trading window falls between the date that a company releases earnings and its subsequent lockup period. This period is usually one fiscal quarter, though it can be shorter or longer depending on the circumstances, and a year’s duration is also not extremely rare.
If there is no lockup period and no blackout period, then any insider who trades in his or her own securities ahead of an upcoming release can be charged with insider trading. However, if there is a lockup period or blackout period, then certain types of trades are prohibited during those times.
The trading window is regulated by insider trading laws that are designed to prevent corporate insiders from exploiting their privileged position to make money from other people’s information. These laws set a maximum amount of time insiders can trade before they must report the purchase or sale.
In the United States, most states have adopted similar insider trading rules that set the maximum amount of time they can spend on the stock before reporting it to the SEC.
The trading window can be defined as the time during which an insider can trade shares he/she has information about without violating any laws. A trading window can be defined as a specific period during which insiders can trade on information they have acquired in the course of their duties at their company.
The trading window is usually set by law and varies from country to country. In the United States, it’s not limited by statute and is commonly considered to end around midnight EST (or 5 p.m. EST when counting from the previous day). However, some jurisdictions limit their insiders’ ability to trade within minutes of such information becoming available to the public to prevent them from exploiting this fact or using inside knowledge for financial gain through market manipulation or other unethical means.
In most countries, there are also rules about what constitutes “inside information” and how long it must remain secret before it can be traded on by insiders.
What Are Ad Hoc Blackout Periods in Insider Trading?
A board may impose a prohibition of insider trading within an trading window as it sees fit. It happens mostly during events such as mergers and acquisitions but might also happen otherwise.
Ad hoc blackout periods are special situations where an outsider (a non-executive director or employee) is prohibited from selling stock in advance of an announcement. They are often used in conjunction with regular insider trading windows.
For example, a senior employee may be very valuable to his organization as an expert on its products and markets, but he may not be able to sell his shares before making a disclosure about those products or markets. In this case, he will be blackballed from selling his shares during the regular trading window for at least one year after making his disclosure.
What Should an Inside Trader Keep in Mind When the Trading Windows Open?
It can be a while before you’re proficient in insider trading. Even good tells and signs can lead you toward bad financial decisions, thereby defeating the whole point of making additional information work in your favor.
- The most important thing an inside trader should do right before the window opens is to have a clear idea of what they are going to do with their information. If they don’t know where they’re going, they won’t have time to get there.
- The second most important thing is to keep track of what happens in the market during their window. This means checking up on stocks and futures prices every few minutes or so, just as you would if you were actually trading them yourself.
- It is best to trade during a weekend or holiday so that there are fewer people around who can see what you are doing. It is also best not to trade in the middle of the night because it may be hard for you to find a place where no one can see what you are doing (such as a hotel).
- It is important not to overtrade during this time because if you do, then your account will get filled up with losers more quickly than if you were just playing around with small amounts of money.
- In general, it is always better not to trade with large amounts of money; however, if someone has made hundreds of thousands of dollars through insider trading in a single day or week, then it makes sense for them to put their money into something like real estate or other assets which have a long-term value rather than putting all their eggs into one basket with high-risk potentials.
Related: What exactly is insider trading? Learn major examples of legal and illegal insider trading and how to deal with insider knowledge.
How Can Employees Avoid Legal Issues While Insider Trading for Publicly Listed Companies?
Do you own stock in a publicly traded company where you’re an employee? Corporate law is pretty stringent in these cases, and you might be in for some legal trouble if you don’t tread carefully.
Though technically all types of insider trading where malicious intent is involved are typically considered illegal — things can become significantly more problematic if you’re an employee compared to when you’re just an investor with some inside information.
So, how do you avoid these legal issues to not end up doing illegal insider trading in these cases? Let’s find out.
Suppose you’re an employee of a publicly traded company, and you want to buy or sell its stock. You should do this only if you’re on good terms with your employer and understand that the company may have a conflict of interest in a transaction. In addition, you mustn’t violate any federal securities laws.
In most cases, employees are prohibited from trading stocks they own during their employment. Employees who have substantial positions in their employer’s stocks are required to disclose the information to their superiors if asked by them.
Employees who have large positions in their employer’s stock must also submit regular reports about their holdings to the Securities Exchange Commission (SEC). This requirement applies even if no trading occurs during their tenure with the company.
Employees who buy or sell shares of publicly held companies often do so without officially selling those positions because it is much easier for them to purchase shares than sell them given the regulatory requirements involved.
Since these transactions are not official sales, employees can avoid paying taxes on gains from such transactions by reporting these transactions as capital gains (which are subject to lower tax rates) instead of ordinary income (which is subject to higher tax rates).
The most important thing to remember is that insider trading is illegal in legal lingo, and it’s against the law for employees of publicly traded companies to trade in the securities of their own companies. The SEC has strict rules in place that prohibit insiders from using material non-public information for their own personal gain.
The insider trading policy of a company is your best friend here, designed to shield you from any legal repercussions. It’s in your best interest to understand and follow it completely to avoid getting into any mess. As these policies differ from company to company, there are one-size-fits-all rules to keep in mind.
Another thing to consider is whether or not you are actually an employee of the company or if you have been hired as an independent contractor. If you have been hired as an independent contractor, then there are no rules prohibiting you from trading on information learned while employed by your company.
On the other hand, if you are considered an employee, then all insider trading rules apply to you and this can include your access to certain types of information such as financial statements and SEC filings.
How Can I Be Most Efficient in a Given Trading Window?
If you are an inside trader, the key to being most efficient is to know when your window opens and closes. Insider trading windows are typically open for about 10 to 15 minutes each day. Inside traders need to monitor these windows closely so that they can make educated decisions about whether or not to trade.
It is important to be aware of the different types of trading windows and their characteristics.
Two key elements determine how much money you can make if you trade in a given trading window:
- The size of the market (the size of the company)
- The number of insiders who have access to information about upcoming events or announcements from the company
For example, suppose you know that there’s going to be an announcement regarding a new product line for your favorite food manufacturer. You may have heard rumors about this being in development for some time, but you never thought it would actually happen so soon.
However, when you hear about this new product line for your favorite food manufacturer, it gets your attention because no one has ever heard about it before! This type of information is definitely newsworthy, so you might think that there will be plenty of opportunities for making money from trading on these types of events. If so, then you would want to get as much advance notice as possible by keeping track of who knows what and when they know it.
It is important to be observant when the trading windows open. It is also important to know when to enter and exit the market. If you trade only during these windows, then you will be most efficient in that particular period.
To sum up:
- When you are an inside trader, your objective is to determine when the window opens and close it as soon as possible. This ensures that you can make maximum profits before or after the window closes.
- As an insider, you want to make sure that you know what information is available to other insiders and regular investors so that you can take advantage of this information before others do.
- You also want to know what types of trades other insiders are making. This will allow you to learn from their mistakes and avoid making them yourself.
How is Insider Trading Tracked and Monitored by the Government During Trading Windows?
The US Securities Exchange Commission (SEC) has rules that govern insider trading. These rules are designed to prevent employees from trading on nonpublic information. However, some of these rules have been questioned. It is argued that the SEC does not always enforce its stringent insider trading rules on time and fails to take appropriate action when it discovers suspicious activity.
In addition to these rules, other regulations govern the closing of trading windows in general that have to be followed by inside traders as well. The NYSE and NASDAQ close their windows at different times of day, with the NYSE closing at 4:00 pm ET on Monday, Wednesday, and Friday and the NASDAQ closing at 4:00 pm ET on Tuesday and Thursday. This means that any trades made during these times cannot be executed until after they close at 5:00 pm ET on Tuesday or Thursday, respectively.
The SEC has long been in the spotlight regarding trading windows and their closure. It’s a regulatory agency that oversees the U.S. securities markets, including how companies report their financial information to investors and how they conduct business with investors (including how they conduct insider trading).
- The SEC has rules and regulations regarding windows in insider trading and their closure, which can be found here.
- In addition to these rules and regulations, there are also official guidelines from the SEC regarding when a window is “open” or “closed.” The SEC uses these guidelines to determine whether a window should be closed earlier or later than usual so that it does not interfere with other important moments for institutional investors, like shareholder meetings or quarterly earnings reports.
- The Department of Justice also has several rules and regulations regarding windows in insider trading and their closure.
- The SEC has stated that it will not investigate any cases that occur during a so-called “short-sale window,” which is the five days before an earnings announcement. This is because the SEC believes that it cannot accurately determine whether the person who took part in the transaction had inside knowledge about a company’s earnings report or not.
Also Read: Learn about Rule 10b5-1 and its significance in insider trading and securities laws. Learn all you need to know to safeguard your money!
Should I Buy and Sell Stocks of a Company if I’m an Employee?
The opposite of a firm having an insider trading policy is a firm disallowing all forms of insider trading. If this is the case, you’d best steer clear of doing any kind of insider trading.
Companies often have policies against employees trading on inside information to avoid potential conflicts of interest between their jobs and personal investments in their companies’ stocks or bonds — but they probably don’t go as far as banning all forms of insider trading outright (although some do). But if your employer catches you or, worse, if the SEC gets a whiff of it, you could land in major trouble and might lose trading privileges altogether.
In these cases, SEC enforces insider trading as strictly as possible.
Insider trading is illegal under U.S. securities law, which prohibits anyone from buying or selling securities based on material non-public information that would affect the price of those securities — even if that person doesn’t intend to profit from it personally (or even disclose it). If you’re found guilty of insider trading, you could face stiff fines and/or imprisonment for up to 10 years.
Insider trading can occur when a person has access to material nonpublic information about a business, its operations, or its financial prospects that aren’t available to the public at large (i.e., not available through normal channels). The insider may have obtained this information illegally, or he/she may have received it as part of his/her job function in the company.
Generally, these trading windows differ from sector to sector and are totally up to the discretion of the board.
The SEC defines insider trading as “the unlawful acquisition of securities by someone who has access to material nonpublic information because of the nature of their employment.” However, it’s not illegal to be an insider trader.
Most publicly traded firms have insider trading policies that are designed to protect inside traders. As long as these policies are foolproof and you follow them religiously, you have no legal issues coming your way. It’s always recommended to maintain good ethics and knowledge when trading in general.
While the law is not completely clear on the issue, it appears that employees of publicly traded companies cannot make trades based on information that they obtain while working at the company. Traders who exploit this loophole may be faced with significant legal issues.
The following is a summary of insider trading laws and how they may apply to your situation:
- Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) prohibits any person from using inside information “to make a profit for himself or herself or another.” Insider trading laws are intended to prevent such activity.
- Section 11(b) of the Exchange Act defines “inside information” as information about an issuer’s business or financial condition that has not been generally disclosed to the public, including in filings with federal regulators. It also includes information about a company’s management, including:
- That a person making an announcement will be making an announcement;
- That earnings per share will rise or fall significantly;
- That sales will increase or decrease significantly; or
- That revenue will rise or fall significantly.