Insider Trading｜Definition, Why It’s Banned, Four Core Elements, Detection, Penalties, and Prevention

Insider trading means buying or selling securities by using material, non-public information (e.g., a major earnings revision, a new share issuance, a partnership/termination, disaster losses). People who can access such information through their role—or anyone who receives it from them—are prohibited from trading on it. In Japan, insider trading is strictly prohibited under the Financial Instruments and Exchange Act (it’s also called “internal trading” or “insider dealing”).
Note: FX margin trading generally has no concept of insider trading, because it does not rely on a single company’s non-public information.

Table of Contents

1. Insider Trading Basics
   Why It’s Banned
   The Four Core Elements
   How It’s Detected
   Typical Cases and Penalties
   FAQs
   Summary
   

1) Insider Trading Basics

What it means
Trading securities based on material information that has not yet been made public.
The rules cover information about listed companies (and in some cases, their subsidiaries).

What instruments are covered?
Not only common stock, but also warrants, corporate bonds, J-REITs, and listed infrastructure funds, among others.
Most ETFs and ordinary mutual funds are outside the scope, but there are exceptions (e.g., funds that invest only in a specific listed company’s shares).

2) Why It’s Banned

The point is market fairness and transparency.
If only a few people can trade on special information, everyone else is disadvantaged. That undermines trust in the market, so the law imposes strict rules.

3) The Four Core Elements

Company Insiders & Information Recipients (“Tippees”)

Insiders include officers and employees (including part-timers) of a listed company and its parent/subsidiaries, business partners and advisors, and certain large shareholders.
Tippees are anyone who directly receives material non-public information from an insider—including family members and friends.

Material Facts

Information that can significantly affect the stock price, for example:

• Share issuance/exchange; capital reduction
• Mergers/alliances (or termination); corporate split
• Major disasters; administrative sanctions; suspension of key transactions
• Large revisions to revenue or dividend forecasts, etc.

Public Disclosure

A state in which the material fact is publicly available, such as on the exchange’s website or via timely disclosure services.

→ If you trade after public disclosure, it is not insider trading.

Trading, Tipping, and Solicitation

It’s illegal not only to trade but also to pass along non-public information or solicit others to trade on it.
This applies when the goal is to help someone profit or avoid losses and the trade occurs before public disclosure.

4) How It’s Detected

Regulatory surveillance
The Japan Exchange Regulation and the Securities and Exchange Surveillance Commission (SESC) continuously monitor trading patterns. Unusual activity may trigger a trading examination.

Whistleblowing
Cases also surface through tips from company insiders. Reports are often anonymous and become leads for investigations.

5) Typical Cases and Penalties

Common patterns
Someone hears non-public news—like a large upward earnings revision or a new business alliance—from an officer or business partner and buys or sells shares before disclosure.

Penalties (examples)

• Individuals: up to 5 years’ imprisonment, a fine up to JPY 5 million, or both.
• Corporations: a fine up to JPY 500 million.
• Confiscation: any assets gained through illegal trading can be forfeited.

Companies may also impose disciplinary measures.

6) FAQs

Q1. Are family members covered?
A. Yes. Trading by spouses or relatives based on inside information is illegal.

Q2. Do ETFs and mutual funds matter here?
A. Most are outside the scope, but exceptions exist (e.g., products focused on a specific listed company). If unsure, check before trading.

Q3. Does insider trading apply to FX?
A. Generally, no. FX does not rely on a company’s non-public information, so the stock-style insider rules do not apply.

Q4. How can it be prevented?
A. Companies should tighten information controls, provide compliance training, and ensure timely disclosure. Investors should understand that using non-public information is illegal and subject to severe penalties.

7) Summary

• Insider trading = trading securities using material, non-public information—strictly illegal under Japanese law.
• The core framework: Insiders/Tippees • Material Facts • Public Disclosure • Trading/Tipping/Solicitation.
• Cases are uncovered through surveillance and whistleblowing, with criminal penalties, fines, and forfeiture.
• Most ETFs/mutual funds are out of scope; FX is out of scope (watch for exceptions).
• Prevention hinges on controls, education, and disclosure—and investors’ correct understanding of the rules.