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Insider trading involves market participants who trade on material nonpublic information. The general public is likely more familiar with insider trading cases involving company directors or managers, although insider trading may involve any market participant, such as brokers. Although rules prohibiting insider trading, in general, are commonplace around the world, enforcement is less common.

The specific regulations as to what exactly constitutes insider trading vary across exchanges. Securities regulations may specify exactly what constitutes material nonpublic information, such as whether the information was from a client order, possibly giving rise to a client precedence violation or a front-running violation.

Client Precedence Client precedence refers to brokers violating the time priority of client orders. A client precedence rule is violated during insider trading when a broker initiates a trade on his or her own account shortly before executing a client's order, with the client's trade being executed at a worse price. Brokers, acting either independently or in collusion, carry out violations of client preference, which requires trade execution and a change in beneficial ownership. Violations of client precedence, by definition, violate price/time priority but do not by themselves give rise to a manipulated price or volume.

Front Running Front running refers to brokers trading ahead of clients' orders. In the case of front running, upon receipt of a large client order, a broker trades shortly before executing a client's order with the expectation that the client's order is likely to move the price. Front running can also involve brokers that, after receiving a client's order, take the opposite position to the client's order in the market without the client's knowledge and then, immediately thereafter, the same broker crosses with the same client off-market at a profit. Front running is independently initiated by brokers and requires trade execution and a change in beneficial ownership. Front running violates price/time priority. Brokers benefit from front running by trading before executing another trade, but front running itself does not give rise to a misleading price and volume. Lewis (2014) identifies another front run, which shows high-frequency trading (HFT) algorithms using the information of any (nonclient) order and trading in advance of that order by virtue of the speed associated with HFT.

Other Forms of Insider Trading Other forms of insider trading can involve using material nonpublic information about the company being traded. Trading rules can mitigate the presence of this form of insider trading by prohibiting trading ahead of the public release of research reports created by brokerages, and the separation of research and trading departments at brokerages (commonly referred to as a “Chinese wall”). Trading ahead of research reports is independently carried out by brokers and requires trade execution and a change in beneficial ownership. Trading ahead of research reports possibly violates price/time priority. Brokers benefit by trading before the release of material nonpublic information, but trading ahead of research reports by itself does not give rise to a misleading price and volume.

Trading rules may limit affiliation between exchange members and member companies, or between members and their investment company securities, to mitigate the flow of information that might be material and nonpublic. Rules can also provide details with respect to the nature of communication between brokerages and the public by regulating how the flow of material nonpublic information is released. Further, trading rules sometimes limit brokerage ownership, the extent to which brokerages can influence or reward employees of others, or ban anti-intimidation and/or coordination activities (e.g., to stop people from reporting illegal activities). These restrictions can limit the flow of material nonpublic information.