Is it insider trading or something else? Shadow trading emerges from obscurity
the practice is still closely monitored and regulated. In Canada, the concept of shadow trading involves using material non-public information (MNPI) from one company to trade securities of another economically linked company. This link can be established through various factors such as financial performance, market value, industry dynamics, or direct competition. The key element of shadow trading is the connection between the two companies without direct access to insider information about the company whose securities are being traded.
In the United States, shadow trading has come under scrutiny, with calls for legislative amendments to address this practice. Studies suggest that significant amounts of shadow-trading transactions have taken place, particularly involving insider purchases of exchange-traded funds (ETFs) containing the insider company. However, the regulatory framework around ETFs in Canada differs from the U.S., with Canadian ETFs not mandated to make daily public portfolio disclosures. This variance in disclosure requirements helps mitigate the risk of shadow trading within the Canadian ETF market.
In Canada, insider trading is explicitly prohibited under both federal Criminal Code and provincial securities legislation. This includes trading based on MNPI, tipping off others about inside information, or recommending securities transactions to third parties. These forms of insider trading aim to ensure fairness and efficiency in capital markets by providing equal access to information for all investors. Violations of insider trading regulations in Canada can lead to severe penalties, including fines, trading bans, and other sanctions.
While shadow trading is not explicitly covered by insider trading laws in most provinces and territories, Québec has specific legislation prohibiting this practice. However, securities regulators across Canada have the authority to intervene in cases where shadow trading causes harm to the public interest. By exercising their powers to prosecute actions contrary to the public interest, regulators can address shadow trading activities that impact market integrity and fairness.
Overall, the recent SEC decision in the United States has shone a spotlight on shadow trading, prompting discussions on regulatory measures to address this emerging form of insider trading. In Canada, while shadow trading is not explicitly prohibited nationwide, the regulatory landscape and enforcement mechanisms are in place to monitor and address such activities to protect the integrity of capital markets. The ongoing scrutiny and attention on shadow trading highlight the importance of maintaining transparency and fairness in securities trading to ensure investor confidence and market stability.
