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If I were planning to sell my stock of the company I work for, then see a non-public draft of the next quarterly report that will make the stock go way up, and cancel my plan to sell based on that information, would this be illegal insider trading?

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    @Rocky - haha, now THAT would definitely be illegal, but again, hypothetical. – hamboy Dec 19 '14 at 4:20
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    @hamboy legal for us, NDA problem for you:) – littleadv Dec 19 '14 at 5:14
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    This question appears to be off-topic because it is about a hypothetical scenario. – littleadv Dec 19 '14 at 7:30
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    As long as the plan is only in your head there is no issue. If you have placed an order in the market or with a broker and subsequently cancel it that would be insider trading. Also note that some companies have periods within which employees are not allowed to trade in the company's stock. If in doubt it is best to ask to the relevant people in your company before acting. – assylias Dec 19 '14 at 14:53
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    @littleadv I think there are plenty of questions about hypothetical scenarios that are on topic. This question might be off-topic because it is a legal question rather than an actual question about finance. – NL - Apologize to Monica Dec 19 '14 at 16:26
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+50

I will restrict my answer to Canada and the US, the only jurisdictions with which I am familiar.

Contrary to the other answer, the statutory and regulatory insider trading regimes in both the US and Canada require an actual transaction ("purchase or sale of securities") to occur. If no transaction occurs, there is no insider trading.

There is a possible exception: I would be interested to see case law test the question of whether engaging in non-transacted interactions with the market (i.e. adding passive liquidity to the order book) on the basis of inside information might qualify as insider trading in the US under the vaguer 10b statutory text. I suspect not, but I can't state that with any certainty.

  • This may be a good answer, but you could greatly improve it by providing references for your assertion. – TTT Aug 20 at 18:21
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Making any decision based on insider information is illegal. Whether the US Government will be able to prove these facts in court is a different question. That said, your post here may be brought in as the proof (and if you think you're anonymous here - think again).

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    Fortunately, this is hypothetical – hamboy Dec 19 '14 at 4:11
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    Trading based on inside information is illegal, we know of no precedent for "not trading" based on inside information, so we can only offer conjecture on whether that will be ruled illegal. Your example with Martha Stewart below is of a stop-loss trade order. Do you have an example of a non-trade that was prosecuted? – NL - Apologize to Monica Dec 19 '14 at 16:31
  • Note that there is no actual legal statute that prohibits anything called insider trading. The legal statute that has been used as the basis for insider trading cases is the one from the Securities Exchange Act of 1934 that prohibits unfair market manipulation. What "unfair market manipulation" actually means has only been established over the decades by the judges' written decisions in the various trials that have occurred -- not by any codified statute. See these two super informative recent Bloomberg articles. – dg99 Dec 19 '14 at 17:18
  • @dg99 so.... the judges agreed that it is illegal then, right? – littleadv Dec 19 '14 at 20:02
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    @hamboy Then you might re-post on law.stackexchange.com as most here are not lawyers (granted there is a large overlap) – D Stanley Aug 20 at 16:25
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I think the answer becomes super clear when you consider a textbook variation of the same situation.

If you were to buy the stock based on insider information (seeing a nonpublic quarterly report), it is clearly insider trading.

In both cases, nonpublic information leads to an action that results in higher profits.

It's also important to define what "planning to sell" means. If you just thought about it, this is an ethical dilemma. If you had an open sell order, there was a record of your intent to sell.

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    Not selling is not an action, it is a lack of action. – NL - Apologize to Monica Aug 21 at 13:05
  • @NathanL Cancelling a sell order is an action. – daytrader Aug 21 at 15:24
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    Not if you never place one. A sell order isn’t a “plan” per the OP. Once you’ve opened an order, you’ve gone from plan to execution. – NL - Apologize to Monica Aug 21 at 15:35
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Not trading on insider information is not insider trading. Generally there must be a trade transacted. There could be an exception if you have an un-transacted order that you cancel, such as a limit order, but I don't know if that has ever been court tested.

One problem with this scenario is if you possess insider information and you proceed with a planned transaction even though it does not meet your best interests. Technically insider trading doesn't require you to benefit. The best advice is to not conduct any trades that involve insider trading, whether they would benefit you or not.

To be extra careful don't publicize your trading plans. If you tell the world you want to make a trade then cancel because of insider information you might be at risk. I'm not saying you committed a crime but there's no reason to test the waters.

Think about this scenario: conspiracy to commit murder is a crime. However to be charged with the crime one must have communicated the plans or have evidence of planning. If you plan to murder someone completely in your head but never tell anyone, write anything down, or possess a murder weapon, no crime has occurred. People think evil things without acting on them constantly. Thought crime is not crime.

  • Conspiracy to commit murder is a crime, but planning a murder is not. If you write your plan down and purchase a (legal) weapon, then you still have not committed a crime. – Martin Bonner supports Monica Aug 23 at 8:37

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