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Insider trading, often referred to as the “scourge” of capital markets, severely erodes the foundation of market fairness, distorts the efficiency of resource allocation, and harms the legitimate rights and interests of investors. It is a core illegal act explicitly prohibited by securities laws worldwide. This article adopts a legal perspective to thoroughly analyze the legal essence, constituent elements, harm mechanisms, and the disruptive impact of insider trading on the “three fairness principles” (openness, fairness, and impartiality), systematically reviews China's current legal regulatory framework and the practical challenges it faces, and draws on international experience and new trends in capital market development to propose systematic recommendations for improving China's legal regulations on insider trading. The aim is to provide theoretical support for strengthening the integrity of the market and enhancing regulatory effectiveness.

I. Insider Trading: Conceptual Definition, Legal Essence, and Core Harm

Insider trading, in simple terms, refers to the act of individuals or entities with access to non-public, price-sensitive material information about a listed company (i.e., insider information) using that information advantage to trade related securities, or disclosing such information and recommending others to trade related securities, in order to obtain improper benefits or avoid losses.

(1) Legal Essence: Breach of Fiduciary Duty and Abuse of Information Asymmetry

Breach of Fiduciary Duty: Traditional insiders such as company directors, supervisors, and senior management personnel, due to their status, form a fiduciary relationship with the company and owe a duty of loyalty and diligence to the company and all shareholders. Using insider information obtained through their positions for trading directly violates their core fiduciary duty to act in the best interests of the company and not to use company assets (information is an important intangible asset) for personal gain.

Violation of the Principle of Information Equality: The cornerstone of the securities market lies in ensuring that all investors have equal opportunities to access material information that affects securities prices. Insider traders, by leveraging their information advantage, act ahead of others before such information is publicly disclosed, effectively depriving other market participants of fair trading opportunities and turning the market into an “information predation arena,” thereby completely undermining the principle of “fairness.”

Extension of the Fraud Theory: In common law jurisdictions (such as the United States), insider trading is often regulated under the category of “securities fraud.” The fraudulent nature lies in the fact that insider traders, aware that their counterparties (uninformed trading partners) are at an informational disadvantage, exploit this advantage to conduct transactions, effectively constituting fraud against the market or trading partners (though in anonymous centralized trading systems, direct counterparties are difficult to identify).

(2) Core harm: Systemic erosion of the foundation of capital markets

Undermining market fairness and efficiency: Insider trading distorts the price discovery mechanism, causing resources to flow to those with information advantages rather than to the most efficient entities, severely weakening market efficiency. More critically, it destroys investors' trust in the fairness of the market, leading small and medium-sized investors to withdraw from the market or demand higher risk premiums, thereby increasing the overall financing costs of the market.

Damage to investor confidence and market reputation: Market confidence is the lifeblood of a thriving capital market. Frequent insider trading triggers widespread doubts among investors about the fairness of the market, leading to capital outflows and reduced market liquidity, severely damaging a country's financial market's international reputation and competitiveness.

Distorting corporate governance and incentive mechanisms: Insider trading provides insiders with illegal profit channels, weakening their motivation to act diligently and enhance the company's long-term value. It may even induce them to conceal information, manipulate performance, or engage in other improper behaviors to create trading opportunities, thereby undermining a healthy corporate governance culture.

Causing systemic risk hazards: Large-scale insider trading cases or those involving key financial institutions may trigger significant market volatility, exacerbate market fragility, and in extreme cases, serve as a trigger or amplifier of financial risks.

II. Legal Elements of Insider Trading: An Analysis of Chinese Law

Articles 50 to 53 of the Securities Law of the People's Republic of China and Article 180 of the Criminal Law clearly define insider trading. The elements of insider trading can be broken down as follows:

(1) Subject of the Act: Persons with Access to Inside Information

Statutory Insiders: Article 51 of the Securities Law lists nine categories of persons, including:

(1) Issuers and their directors, supervisors, and senior management personnel; (2) Shareholders holding more than five percent of the company's shares and their directors, supervisors, and senior management personnel, as well as the company's actual controllers and their directors, supervisors, and senior management personnel; (3) Companies controlled or actually controlled by issuers and their directors, supervisors, and senior management personnel; (4) Persons who can obtain insider information about the company due to their positions or business dealings with the company; (5) Acquirers of listed companies or parties to major asset transactions, and their controlling shareholders, actual controllers, directors, supervisors, and senior management personnel; (6) Personnel of securities trading venues, securities companies, securities registration and settlement institutions, and securities service institutions who may obtain insider information due to their positions or work; (7) Staff members of securities regulatory authorities who may obtain insider information due to their duties or work; (8) Staff members of relevant competent authorities or regulatory bodies who, due to their statutory duties in managing the issuance, trading, or acquisition of securities, or the acquisition or major asset transactions of listed companies, have access to insider information; (9) Other persons specified by the State Council's securities regulatory authority as having access to insider information.

Persons who illegally obtain insider information: Persons who obtain insider information through illegal means such as theft, fraud, extortion, eavesdropping, inducement, espionage, or private transactions.

Expansion of the concept of “presumed insiders”: In practice, for individuals who engage in related transactions after contacting insiders during the sensitive period of insider information and cannot provide a reasonable explanation or evidence to exclude suspicion, regulatory and judicial authorities often presume, based on the rule of experience and the standard of high probability, that they are aware of the insider information and bear the burden of proving their own “innocence.”

(2) Core object: Insider information

Non-publicity: The information has not yet been published in media designated by the State Council's securities regulatory authority or is not widely known and understood by the market. Once the information is legally disclosed (e.g., through a temporary announcement), its “insider” status ceases to exist.

Materiality: The information itself has “price sensitivity,” meaning that once disclosed, it is likely to significantly impact the trading price of the relevant securities. Judgment criteria include the rational investor standard (whether the information would influence the investment decisions of rational investors) and empirical market price fluctuations (market reaction after the information is disclosed). Articles 80 and 81 of the Securities Law list common scenarios constituting material events (such as major investments, major contracts, major losses, mergers and acquisitions, changes in control, etc.).

Relevance: The information must be directly related to a specific issuer (listed company) or the securities it issues.

(3) Objective Conduct

Trading securities: During the sensitive period of insider information, buying or selling stocks, bonds, or other securities directly related to the information, or their derivatives (such as stock index futures or options).

Disclosing information: During the sensitive period of insider information, disclosing or providing the information to others.

Suggesting others to trade: During the sensitive period of insider information, explicitly or implicitly suggesting others to trade the relevant securities.

Trading through others' accounts: In practice, to evade regulation, insiders often use accounts controlled or directed by spouses, relatives, or associated parties to conduct transactions.

(4) Subjective Aspect: Intent

Insider trading is a typical intentional crime/illegal act. The perpetrator must know that the information they are using is insider information and intentionally use such information for trading, disclosure, or advising others to trade. For those who “illegally obtain insider information,” it is required that they know the information is illegally obtained insider information. Negligence does not constitute this crime/offense. Proving subjective intent often relies on indirect evidence such as objective behavior (e.g., timing of transactions, transaction scale, transaction patterns highly consistent with the information), communication records, and fund transfers for comprehensive inference.

(5) Sensitive Period

This refers to the period from the formation of the insider information until its lawful disclosure. Determining the exact point in time when the information “forms” is a practical challenge, typically using the standard that the information has clear, executable substantive content (such as the signing of a memorandum of understanding between the parties involved in a restructuring or the formation of a draft board resolution).

III. China's Legal Regulatory Framework for Insider Trading and the Challenges It Faces

(1) Regulatory Framework: A Three-Pronged Approach of Administrative, Criminal, and Civil Measures

Administrative Supervision and Penalties: The China Securities Regulatory Commission (CSRC) is the main enforcement agency, exercising investigative powers under the Securities Law, taking administrative enforcement measures (such as freezing and seizing assets), and imposing administrative penalties (including confiscation of illicit gains, imposition of substantial fines, and market bans). In recent years, the severity of penalties has significantly increased, with the amount of fines and confiscations reaching new highs.

Criminal Sanctions: Article 180 of the Criminal Law stipulates the crimes of insider trading and disclosure of insider information, with a maximum penalty of ten years' imprisonment and a fine of one to five times the illegal gains. The judicial interpretations of the “Two Highs” (the Supreme People's Court and the Supreme People's Procuratorate) have further detailed the standards for determining guilt and sentencing.

Civil compensation: The Securities Law stipulates that individuals engaged in insider trading shall bear civil liability for compensation in accordance with the law. However, in practice, civil claims still face obstacles such as difficulty in proving causation, complex loss calculations, high litigation costs, and an incomplete class action mechanism.

(2) Practical Challenges and Difficulties

Difficulty in Proving the “Use” of Insider Information: How can it be conclusively proven that the perpetrator's trading decisions were entirely or primarily based on insider information, rather than public information, market judgments, or personal strategies? This is particularly challenging when the trading behavior appears to have a certain “reasonable” connection to the information. This highly relies on the construction of an indirect chain of evidence, placing extremely high demands on enforcement and judicial capabilities.

Blurred boundaries between “materiality” and “non-publicity” of information: In new business models and complex events, whether information meets the ‘materiality’ standard often remains contentious. The concept of “non-publicity” also faces challenges in the digital age due to the rapid spread of information and diversified channels, necessitating an updated standard for determining “public knowledge.”

Disputes over the determination of “illegal acquisition” and “presumed insiders”: The interpretation of “illegal means,” the scope of presumed insiders, and procedural safeguards (such as the allocation of the burden of proof and the adequacy of the right to rebuttal) often become focal points of dispute in cases.

Insufficient regulatory coordination across markets and borders: The use of derivatives markets or overseas markets for insider trading or to evade regulation is increasing, necessitating strengthened cross-market regulatory collaboration, cross-border enforcement evidence collection, and judicial assistance mechanisms.

Challenges posed by new technologies and trading methods: High-frequency trading, algorithmic trading, encrypted communication, dark pool trading, etc., make insider trading more covert, complex, and instantaneous, posing efficiency bottlenecks for traditional regulatory measures.

Insufficient effectiveness of civil compensation mechanisms: The low proportion and lengthy duration of effective compensation obtained by investors through civil litigation constrain the remedial function of civil liability for victims and its deterrent function for violators.

IV. Reflections on Improving the Legal Regulation of Insider Trading in China

To more effectively combat insider trading and maintain a healthy capital market system, it is necessary to continuously optimize the regulatory framework within the legal system:

(1) Legislation and interpretation: Clarify rules and enhance predictability

Refine the criteria for determining the “use” element: Through judicial interpretations or guiding cases, clarify the factors for assessing the “high degree of correlation” between trading activities and insider information (such as the urgency of the trading timing, consistency of trading direction, abnormality of trading scale, deviation from trading habits, and likelihood of information access), and establish clearer, more operational presumption rules.

Dynamically refine the criteria for determining “materiality”: In conjunction with market development, introduce a more flexible “rational investor + price sensitivity” comprehensive judgment standard based on typical scenarios, and encourage the use of expert witnesses and empirical analysis to assist in determination.

Clarify the boundaries and procedural safeguards for “presumed insiders”: Clearly define the specific circumstances in which presumption applies, the standard of proof for rebuttal, ensure procedural fairness, and prevent the abuse of presumption from harming the legitimate rights and interests of parties. Explore the establishment of “safe harbor” rules (e.g., proving that transactions were based on pre-established plans).

Strengthen the civil liability system: Explore the conditional introduction of “presumed causation” in civil litigation involving insider trading (drawing on judicial interpretations regarding false statements) to reduce the burden of proof on investors. Optimize loss calculation methods (e.g., actual value calculation method, price difference method). Improve the securities class action litigation system to reduce the cost of rights protection and enhance litigation efficiency.

(2) Enforcement and judicial aspects: Enhance efficiency and strengthen deterrence

Strengthen the application of regulatory technology: Invest in the research and development of intelligent monitoring systems, and use big data analysis, artificial intelligence, network graph analysis, and other technologies to conduct real-time monitoring, intelligent early warning, and in-depth analysis of abnormal trading behavior and information transmission chains to enhance detection capabilities and evidence collection efficiency.

Deepening the coordination between administrative and criminal enforcement: Optimize the mechanisms for transferring leads, sharing information, and conducting joint investigations between the China Securities Regulatory Commission (CSRC) and public security and procuratorial authorities to ensure that cases involving suspected crimes are promptly referred to criminal proceedings. Unify enforcement and judicial standards to reduce discrepancies in interpretation.

Enhancing cross-border regulatory cooperation: Actively participate in multilateral frameworks such as the International Organization of Securities Commissions (IOSCO), deepen the implementation of bilateral regulatory cooperation memorandums with major capital market jurisdictions, and improve the efficiency of cross-border investigations, evidence collection, and information exchange.

Balancing “zero tolerance” with “precise enforcement”: Maintain a high-pressure stance, resolutely investigate and impose maximum penalties on major and serious cases to create a strong deterrent effect. At the same time, improve the precision of enforcement to avoid “collateral damage” to normal market activities.

(3) Corporate governance and market self-regulation: Strengthening the first line of defense

Reinforcing the primary responsibility of listed companies for internal controls: Require listed companies to establish and improve systems for registering and managing insiders with access to material non-public information, confidentiality systems, and information barriers, standardize the flow of material non-public information, and clarify responsibilities. Strengthen compliance training and accountability for directors, supervisors, and senior management.

Enhance the “gatekeeper” role of intermediaries: Strengthen the obligations of securities firms, law firms, and accounting firms to prevent insider trading risks during project execution, require them to establish effective internal control and compliance systems, and strictly hold them accountable for dereliction of duty.

Strengthen the front-line regulatory functions of stock exchanges: Grant stock exchanges greater authority and resources in real-time monitoring, inquiries into abnormal transactions, and self-regulatory measures, enabling them to serve as the frontline in detecting and curbing insider trading.

Deepening investor education: Continuously disseminate legal knowledge, the harms, and identification methods related to insider trading to enhance investors' self-protection awareness and willingness to report and supervise, fostering a market culture of integrity where “everyone condemns” such practices.

(4) Proactive exploration

Explore a “whistleblower reward and protection” system: Drawing on experiences from the United States and other countries, establish an attractive financial reward mechanism and strict measures for identity confidentiality and protection against retaliation to incentivize insiders to report insider trading violations.

Study the introduction of an “administrative settlement” system: Under strictly defined conditions and procedures, explore the application of administrative settlements for certain eligible cases to expedite case resolution, conserve enforcement resources, and enable aggrieved investors to receive compensation sooner.

Monitor financial technology regulation: Closely track the application of blockchain and artificial intelligence in securities trading, assess their impact on insider trading behavior patterns and regulatory approaches, and proactively develop adaptive regulatory rules.

V. Conclusion

Insider trading is by no means a harmless form of “regulatory arbitrage,” but rather a fatal blow to the principles of fairness, impartiality, and transparency upon which capital markets rely for their survival. At its core, it represents the erosion of information privilege and fiduciary duty. Although China has established a relatively comprehensive “criminal, administrative, and civil” three-pronged regulatory framework, it still faces significant challenges in areas such as proving “use,” defining information boundaries, addressing new challenges, and enhancing the effectiveness of civil remedies.

Eradicating this “legal禁区” is not something that can be achieved overnight, nor can it be accomplished by a single measure. It requires legislators to continuously refine the clarity and adaptability of rules, enforcement and judicial authorities to continuously enhance their professional capabilities and technological capabilities, listed companies and intermediaries to fulfill their duties as market “gatekeepers,” and investors to actively protect their own rights and participate in supervision. Only by uniting the efforts of legislation, law enforcement, judiciary, self-regulation, corporate governance, and investor education within the framework of the rule of law can we establish a comprehensive, intelligent, and sustainable regulatory system that ensures “no one dares to violate, no one can violate, and no one wants to violate” the rules. This will effectively curb the proliferation of insider trading, truly establish the foundation of integrity and fairness in the capital market, and provide a solid, transparent, and trustworthy financial foundation for China's high-quality economic development. This is a long-term battle to safeguard the soul of the market. Only through sustained efforts can we protect the clear skies of the capital market.