From Shadows To Skeletons
What’s Hiding in Your Employee and Firm Trading Data?
As financial markets evolve, spanning everything from traditional securities to digital assets, hidden risks increasingly lie beneath the surface. What may appear to be routine transactions can mask misconduct, including insider activity that is difficult to detect without advanced oversight and surveillance tools.
The Emergence of Shadow Trading
For decades, insider trading cases followed a familiar pattern: employees or executives traded their own company’s securities while in possession of material nonpublic information (MNPI). In 2022, however, the SEC introduced a new theory in SEC v. Panuwat: shadow trading.
What is Shadow Trading?
Shadow trading occurs when someone uses confidential information about one company to trade the securities of another economically linked company. Unlike classical insider trading, which involves direct use of a company’s own MNPI, shadow trading exploits correlations between businesses or sectors, making it far more difficult to detect.
Expanding the Scope of Surveillance
Traditional surveillance tools monitor trades against a firm’s own watch, restricted, or blackout lists. Shadow trading requires a broader view that accounts for economically linked entities and sector relationships.
Effective trade surveillance should:
- Track securities across industries and sectors
- Compare employee trades against MNPI, sector events, and correlated entities
- Leverage analytics to distinguish genuine signals from background activity
Without this broader scope, firms risk overlooking trades that appear ordinary but are tied to nonpublic developments elsewhere.
Finding the Hidden Risks
Shadow trading is challenging to identify because it blends into legitimate activity. To mitigate risk, compliance teams must be able to detect:
- Unusual trading patterns aligned with market-moving announcements
- Cross-industry correlations linking one company’s MNPI to another’s securities
- Sector-specific vulnerabilities where privileged insights may be exploited
Missing these indicators not only invites regulatory scrutiny but also risks reputational damage.
Technology as a Safeguard
Although shadow trading has drawn recent attention, it is part of the broader challenge of detecting insider trading in all its forms. Modern compliance technology, such as StarCompliance’s (Star) Insider Trading Compliance Solution, helps firms strengthen protection by:
- Scanning trades to identify activity ahead of major market events, including price movements, mergers, and acquisitions
- Streamlining case management within Star’s ecosystem, with direct access to supporting data and news sources
- Maintaining complete insider records so every detail is available should regulators or issuers request a list
Staying Ahead of Evolving Risks
Shadow trading underscores the evolving nature of insider misconduct and the importance of advanced surveillance. By updating policies, enhancing monitoring, and leveraging technology, firms can better protect employees, safeguard market integrity, and reduce regulatory exposure.
Video On Demand: Shadow Trading Unveiled
For deeper insights, watch Star’s on-demand session “A Regulator & a Prosecutor Walk into a Bar: Shadow Trading Unveiled.” This candid discussion explores how regulators and prosecutors view shadow trading, what compliance officers should prepare for, and the steps firms can take to stay ahead.
No Tricks, Just Trust: Future-Ready Compliance with StarCompliance
As markets grow more complex, Star delivers future-ready solutions to help firms manage compliance across MNPI, firm trade surveillance, and crypto dealings. With advanced analytics, automation, and a global platform, Star empowers compliance teams to reduce risk, align with regulation, and build a stronger culture of compliance.
Book a demo today to see how Star can help your firm stay ahead of emerging risks – click [HERE].
Riding the Regulatory Wave
