Insider Dealing: What It Is, How It Works, Why It Persists

Every now and then, a share price starts climbing days before a takeover is announced. The move is sharp, unexplained, and over before most investors even notice. Then the news breaks and everything makes sense. Someone knew. Someone always knows. Insider dealing remains one of the most persistent problems in UK financial markets, and understanding how it works is one of the most useful things a private investor can learn.

Insider dealing, in its simplest form, is trading on information that is not yet public. Under UK law, specifically the Criminal Justice Act 1993 and the EU Market Abuse Regulation (which was retained after Brexit), it is a criminal offence to deal in securities while in possession of inside information. Inside information is defined as information that is precise, that has not been made public, that relates to particular securities or issuers, and that would, if made public, be likely to have a significant effect on the price. The definition sounds technical, but the principle is straightforward. If you know something the market does not, and you trade on it, you are breaking the law.

The mechanics of how inside information flows through the City are more interesting than the legal definition suggests. A company preparing for a takeover will involve dozens of people long before any announcement is made. Investment bankers structure the deal. Lawyers draft the documents. Accountants prepare the due diligence. Public relations advisors plan the communications strategy. Board members on both sides of the transaction are briefed. At every stage, the circle of people who know what is about to happen grows wider. The journalist Ian Lyall, a former City news editor at the Daily Mail, described this information network as a latter day incarnation of the old gentlemen’s club that once ran the Square Mile. Friends, acquaintances, and former colleagues swap valuable intelligence on takeovers and other price sensitive events as a kind of unofficial currency.

The problem is that information does not stay inside these circles. It leaks. Sometimes deliberately, sometimes carelessly, but it leaks consistently. A PR advisor might share something to position a client favourably. A banker might mention a deal to a friend over dinner without thinking twice. A compliance officer might notice unusual activity but not flag it quickly enough. The result is that price sensitive details pass from hand to hand as part of the everyday fabric of City life. The Financial Conduct Authority’s own data bears this out. In the years covered by the old FSA’s annual reports, suspicious share price movements preceded almost one third of all UK takeovers. That is not a statistical quirk. It is a systemic problem.

For the private investor sitting at home with a trading screen, this matters more than it might first appear. When inside information drives a share price up before an announcement, the insiders are buying at a low price and everyone else is buying at an inflated one. The playing field is not level. If insider dealing is allowed to continue unchecked, it undermines confidence in the market, damages the reputation of the City as a global financial centre, and can even increase the cost of raising capital. Research by John C. Coffee at Columbia University found that it can be significantly more expensive to raise equity in Britain, where enforcement has historically been lighter, than in the United States, where penalties are far more severe. If you own shares in one company that is quoted in both London and New York, Coffee’s research suggested the American listing will carry a premium of around 37 per cent, largely because investors trust a more tightly regulated market.

The most common misconception about insider dealing is that it is a victimless crime, or that it is simply clever trading by well connected people. Neither is true. Every insider who profits is taking money from someone on the other side of the trade who did not have the same information. The person selling shares at 200p the day before a 300p takeover bid would not have sold if they had known what was coming. The insider’s gain is directly someone else’s loss. The other misconception is that it rarely gets punished. That was a fair criticism of the old Financial Services Authority, which managed only a handful of successful criminal prosecutions in its first decade overseeing the market. But the FCA, which replaced the FSA in 2013, has been considerably more aggressive. Operation Tabernula, which concluded in 2016, was the largest insider dealing investigation in UK history, resulting in five convictions including professionals from Deutsche Bank and various hedge funds. Since then the FCA has secured convictions in a steady stream of cases. Fabiana Abdel Malek, a compliance officer at UBS, was convicted in 2019 for passing inside information to a friend who traded on it. Mohammed Zina, a former investment banker, was sentenced in 2021 for trading ahead of deals he had worked on. The regulator has also increased its use of civil penalties and market abuse fines, which do not require the higher burden of proof that criminal cases demand.

What has not changed is the fundamental challenge. The City still runs on relationships. Information still flows through networks of trust and mutual benefit. Technology has made some forms of insider dealing harder. Large institutional trades are now typically executed through algorithms at volume weighted average prices, broken into thousands of small packages throughout the day, which makes front running more difficult than it was when a single broker might place a block order worth millions of pounds. But the human element remains. As long as deals involve people, and as long as those people have friends, colleagues, and financial interests of their own, inside information will continue to find its way into the wrong hands.

The practical lesson for private investors is not to become paranoid, but to be realistic about the environment in which you are trading. If a share price is moving sharply on no apparent news, treat that as information in itself. Ask why. Check the RNS feed for regulatory announcements. Look at the volume. If a stock you own suddenly spikes 10 per cent on a quiet Tuesday with no news, somebody may know something you do not. You cannot stop insider dealing from happening, but you can make sure you are not the person on the wrong end of the trade, buying at a price that already reflects information you have not been given. That awareness, more than any single trading rule, is what separates the informed investor from the rest.

This article is for informational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risk. Always do your own research before making any financial decisions.