Definition of Insider Trading

The fluctuations in the stock market's interests are enormous. To maintain equal access to information and preserve the integrity of the stock market, the Securities Exchange Act (hereinafter referred to as the Securities Act) and related regulations explicitly prohibit corporate insiders, quasi-insiders, and information recipients from buying or selling securities related to significant undisclosed information they are privy to. This ensures fair market transactions and protects investors' rights.

The essential elements for insider trading include the following: The person committing the act must be an insider, quasi-insider, or information recipient of the company or someone acting on behalf of others. The person must have actual knowledge of the significant information and engage in buying or selling securities related to that information within 18 hours before or after the information is made public or becomes known. These securities must be stocks or other equity-based securities traded on the company’s listed exchange or securities firm’s premises.
 

(For further details on insider trading, please refer to the Securities Exchange Act | What to Do in Cases of Insider Trading?)

Method of Calculating Profits from Insider Trading

Once insider trading is established, calculating the amount of profit gained from insider trading has been a subject of debate for many years. If the stock is bought or sold, should the market's overall impact on price trends be deducted? If the stock is not successfully sold and the profit is unrealized, does it still count as profit from insider trading? In other words, there has been ongoing controversy over how to calculate the financial or property benefits gained from insider trading.

Supreme Court's Opinion

The Supreme Court’s criminal division has made a unified legal interpretation. It believes that the calculation method for the property or financial benefit obtained from insider trading, as stipulated by the Securities Act, should depend on whether the profit is realized or unrealized. If the profit is realized, it is calculated by multiplying the difference in stock prices between the buy and sell transactions by the number of shares (this is the “actual gain method”). If the profit is unrealized, it is calculated by multiplying the difference between the purchase price of the stock (or sale price) and the average closing price for the 10 business days after the information is made public by the number of shares (this is the “presumed gain method”). The calculation of the profit should deduct costs such as securities transaction tax and transaction fees.

From the legislative purpose of insider trading, which emphasizes "preventing the criminal from unjustly benefiting from the crime," if the person has knowledge of insider information and buys (or sells) stock, the increase (or decrease) in stock price due to that information should be calculated after the crime is committed. If the increase or decrease is due to market factors before or after the public release of the information, calculating it would lead to the person unjustly benefiting from the crime. This is contrary to the legislative intent.

Furthermore, neither the legal wording nor the legislative rationale clarifies that the "price fluctuation" must be related to the public release of "significant information." Therefore, when calculating the profits from insider trading, the court does not need to consider economic or non-economic factors that influence stock price fluctuations.
According to the Supreme Court's view, in calculating profits from insider trading, even if related to market trends, there is no need to consider economic or non-economic factors that influence stock price changes. However, it must be emphasized that insider trading is explicitly prohibited by law, and the public must carefully assess and avoid major losses. If there are related legal disputes, it is advised to consult a professional lawyer.
 

Reference:Financial Supervisory Commission, Executive Yuan

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