How Does the SEC Catch Insider Trading?
Introduction
Somewhere in a government building, a system is processing your trades right now.
Not just your trades – everyone’s trades.
About one billion records per day flow into the SEC’s surveillance infrastructure, timestamped down to the microsecond, cross-referenced against every corporate announcement, every earnings report, every merger filing.
This system doesn’t care about your excuses. It doesn’t care about your intentions. It cares about patterns.
If you think you’re smarter than a system designed to find patterns across five billion digital footprints, think again.
How the SEC Catches Insider Trading
1. Pattern Recognition (ARTEMIS)
The SEC’s ARTEMIS system processes billions of trades daily. It’s the world’s most advanced insider trading surveillance platform.
ARTEMIS isn’t looking for one trade. It’s looking for correlated clusters of trades, across multiple accounts, that align with nonpublic corporate events.
You can’t “blend in” by making small trades. The system notices small trades because it notices all trades. It’s looking for anomalies – patterns that deviate from the norm.
ARTEMIS flagged an account that bought call options on a company just minutes after a board meeting approved a merger. The trader tried to hide through an offshore account. The trade was still flagged because the options activity, not the trader’s name, was suspicious.
2. Timing Analysis (MIDAS)
MIDAS ingests every order, every second, from every exchange and dark pool. It doesn’t just see what you buy – it sees when you buy.
If you trade a security five minutes after a material event, it’s not a coincidence. MIDAS notices the spike in volume and the change in order routing.
A trader used a friend’s brokerage account to buy call options on Company A five minutes after the company’s board approved a merger. MIDAS flagged the spike in volume and the anonymous trade still matched the insider’s pattern.
3. Network Analysis (Blue Sheets)
Blue sheets data links every trade to every brokerage account, and then to every person. It doesn’t matter if you used your friend’s account.
When the SEC subpoenas blue sheets, they don’t just get your trades. They get your friend’s trades, your family’s trades, your co-worker’s trades. If your friend buys the same options you did, on the same day, the system flags it.
A trader tipped his brother, who bought call options. Blue sheets data linked their accounts through shared addresses and IP logs.
4. Communication Subpoenas
When the SEC investigates, they don’t just look at your trades. They look at your emails, your texts, your chat logs.
They subpoena your employer’s email server, your employer’s phone records, your employer’s messaging apps. If you communicate with anyone who trades on material nonpublic information, the SEC can link you.
A tipster sent a message to a friend on WhatsApp hours before a suspicious trade. The SEC subpoenaed the message, confirming the tip.
Why the Government Always Wins
1. They Control the Timeline
Most people think the investigation starts when they get a subpoena. Wrong.
The SEC’s surveillance systems start the investigation the moment you trade.
The average insider trading investigation runs 18 months before you ever hear from the SEC. By the time you get a subpoena, the SEC already knows.
2. They Have the Data
The SEC doesn’t have to prove intent. They prove patterns.
If you buy call options before a merger announcement, and those options spike in value, the data speaks for itself.
The SEC doesn’t have to prove you had a conversation. They prove you had the opportunity to have a conversation.
3. They Have the Leverage
The SEC doesn’t have to put you in jail. They can take your house, your car, your bank accounts.
They can bar you from the securities industry for life.
Most people fold because the SEC’s leverage is overwhelming.
4. Cooperating Witnesses
The SEC doesn’t need confessions. They need cooperators.
If your friend flips on you, if your broker flips on you, if your co-worker flips on you, the SEC wins.
If you’re involved in an insider trading ring, the first person to cooperate wins the Get Out of Jail Free card.
The “Everyone Does It” Myth
Most people who commit insider trading think they are being clever.
They use a friend’s brokerage account. They communicate through encrypted messaging apps. They wait a few days before trading so it does not look too obvious.
They think these precautions will protect them.
They are wrong.
The Failures of “Clever” People
1. The “Family Plan” Fail
A mother bought shares of a company after hearing her son, who worked for the company, talk about a possible merger. She used her own brokerage account.
The SEC subpoenaed her son’s emails. The emails contained details of the merger, which the SEC linked to the mother’s trade.
2. The “Friendship Fail”
A trader tipped his friend, who then bought options on a company. The friend tried to hide the trade by using a third party’s brokerage account.
The SEC subpoenaed the friend’s phone records. The records showed repeated calls between the trader and the friend before the trade.
3. The “Burner Phone Fail”
A tipster used a burner phone to communicate with a friend who traded on the tip. The tipster thought the burner phone would protect them.
The SEC subpoenaed the burner phone’s call logs and linked the calls to the tipster’s home address.
4. The “Email Encryption Fail”
A tipster used encrypted email to communicate with a friend who traded on the tip. The tipster thought the encryption would protect them.
The SEC subpoenaed the email provider for metadata, which linked the emails to the tipster’s IP address.
Conclusion
The SEC has spent the last decade building surveillance infrastructure that is designed to catch the clever, the cautious, and the careless.
If you think you can outsmart a system that processes billions of trades daily, you are wrong.
If you think you can hide in the crowd, you are wrong.
If you think you can escape detection by waiting a few days, or by using a friend’s brokerage account, or by using encrypted messaging apps, you are wrong.
The only way to avoid prosecution for insider trading is to not trade on inside information.
The system is watching. The system is waiting.
Contact Spodek Law Group
If you are under investigation or have concerns about insider trading, our attorneys can help. Call us today at 212-300-5196 or contact us online for a confidential consultation.
