We all know insider trading is illegal. So why does it still happen? It’s because it’s almost impossible to stop. Let me show you why.
What Actually Counts as Insider Trading
Insider trading is defined as using secret information that isn’t available to the public yet in order to make a trade. These can include earnings leaks, merger talks, or FDA decisions, basically any material information that could move a stock price before everyone else knows about it.
Sounds straightforward, right? Here’s the problem: In order to catch someone, you have to prove that they knew it was insider information and that they traded on it. And that’s a lot harder than you might think.
The Legal Loopholes That Make It Easy
Have you ever heard of a 10b5-1 plan? It allows executives to pre-schedule their trades months in advance. The idea is that if you set up your trades before you know any inside info, you’re in the clear.
But here’s where it gets sketchy: If they cancel it or tweak it later—say, right before bad news drops—that’s when things get suspicious. But proving intent? That’s where the SEC hits a wall.
Then there’s the web of shell companies, offshore accounts, cousins, spouses, and random business associates who just happen to make perfectly timed trades. Trades go through these channels, and by the time that transaction is traced, the money is typically gone. The paper trail gets so convoluted that it’s nearly impossible to connect the dots back to the original insider.
Finding a Needle in a Haystack
Millions of trades happen every day on the stock market. Millions. So finding one suspicious trade is like finding a needle in a haystack. Even with sophisticated algorithms and monitoring systems, the sheer volume of market activity makes it incredibly difficult to flag the right transactions.
Sure, sometimes patterns emerge, like when an executive’s brother-in-law suddenly buys $500,000 worth of call options right before a merger announcement. But most insider trading is far more subtle than that. Small trades, spread across multiple accounts, executed over time. Nothing that screams “illegal activity” until you piece together months of data.
The Cost of Catching Them
And even if the SEC finds someone, it takes years of investigation and millions of dollars to prove it. We’re talking forensic accountants, subpoenas, witness testimony, legal battles that drag on forever. The accused can afford top-tier lawyers who know every loophole in the book.
Meanwhile, the SEC has limited resources and thousands of other cases competing for attention. So unless it’s a massive, high-profile case that makes headlines, many investigations get dropped or settled for a fraction of what was actually stolen.
And that’s why most insiders walk. The risk-reward calculation is tilted heavily in their favor. The chances of getting caught are slim. The chances of actually facing serious consequences? Even slimmer.
So What Can Actually Be Done?
The reality is that until enforcement gets faster, penalties get harsher, and monitoring gets smarter, insider trading will continue to be one of those “illegal but hard to stop” activities in finance. It’s not that regulators don’t care, it’s that the system is stacked against them.
Tighter restrictions on 10b5-1 plans, real-time trade monitoring with AI, harsher penalties that actually hurt, and maybe, just maybe, we’d see fewer insiders gaming the system. But for now? The game continues, and most players never face the music.
