How the SEC Detects Insider Trading

How the SEC Detects Insider Trading

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. If you bought stock in a company two weeks before they announced an acquisition, that transaction is sitting in a database waiting to be analyzed.

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 SEC has spent the last decade building surveillance systems specifically designed to catch exactly these patterns, and those systems have names: ARTEMIS, MIDAS, SONAR. They are not guessing. They are hunting.

This article is going to explain exactly how the SEC detects insider trading. Not the vague “sophisticated surveillance” language you see on other websites, but the actual systems, the actual capabilities, and the actual reasons why people who think they are being careful still end up facing federal charges years after they made their trades.

Inside ARTEMIS: The 10 Billion Record Database

Lets start with the system most people have never heard of. ARTEMIS stands for Advanced Relational Trading Enforcement Metrics Investigation System. Its named after the Greek goddess of the hunt, which should tell you something about its purpose.

Heres what ARTEMIS actualy does. The system contains aproximately 10 billion equity and options trade records. Thats not a typo – ten billion. Every trade made on every U.S. exchange, going back years, sitting in a searchable database. When suspicious trading activity gets flagged, ARTEMIS dosnt just look at that one trade. It conducts what the SEC calls “longitudinal, multi-issuer, and multi-trader” analysis.

What does that mean in practical terms? It means ARTEMIS can identify patterns across multiple stocks, multiple traders, and multiple time periods simultanously. If you made money on insider information once, and then did it again six months later with a different company, ARTEMIS can connect those trades. If you and your college roommate both made suspiciously timed trades on the same stock, ARTEMIS can see that relationship even if your accounts arnt linked.

The system ranks trades based on how suspicious they look. Then human investigators – the Market Abuse Unit – dig into the highest-ranked cases. This isnt random sampling. Every profitable trade made before a major corporate announcement is already in the system, waiting to be analyzed.

MIDAS: One Billion Records Per Day

While ARTEMIS stores historical data, MIDAS (Market Information Data Analytics System) is watching whats happening right now. Every day, MIDAS collects about one billion records from the propriatary feeds of all 13 national equity exchanges.

This is the same data that only the most sophisticated market participants normaly access – high-frequency traders, market makers, the big players. The SEC is watching the same feeds, timestamped to the microsecond. They can see the exact sequence of events: when you placed your order, when it executed, what was happening in the market at that precise moment.

Why does this matter? Because MIDAS can reconstruct events in ways that reveal suspicious activity. If you tried to hide your trading by breaking it into smaller orders, MIDAS sees the pattern. If you tried to time your trades to blend in with normal market activity, MIDAS can seperate your trades from the background noise.

Alot of people think the SEC is some slow, bueracratic agency that cant keep up with modern markets. The reality is they have the same data feeds as Wall Street’s most sophisticated firms, and they have teams of quantitative analysts whose entire job is finding patterns that indicate fraud.

FINRA and the 450 Annual Referrals

The SEC dosnt work alone. FINRA (Financial Industry Regulatory Authority) is contracted to surveil the markets, and they generate over 450 insider trading referrals to the SEC every single year. Thats more then one referral per day.

FINRA monitors 100% of the U.S. securities marketplace. Stocks, bonds, options, derivatives – everything. There system, called SONAR, has been operating since 2001. It traces unusual price and volume movements across all markets and combines that data with news feeds. When your stock suddenly jumps right before an announcement, SONAR notices.

But heres what most people dont realize: FINRA also uses social media analytics and geographic proximity analysis. There not just looking at trades – there mapping relationships. If you and someone who works at the company both posted from the same location on social media, that connection can be identified. If your phone records show you were at the same conference, that can be discovered during investigation.

The old model of insider trading detection was reactive – wait for a tip, then investigate. The new model is proactive. The systems are constantly scanning for patterns, and the human investigators focus on the cases where the data looks most suspicious.

Why Encrypted Messages and Code Words Dont Work

Heres a case that should worry anyone who thinks there smarter then the SEC. In 2017, seven individuals were charged with insider trading based on confidential information from 30 corporate deals. They used shell companies. They used code words. They used encrypted, self-destructing messaging applications specifically designed to avoid detection.

They got caught anyway.

How? The SEC’s enforcement staff used data analysis to uncover the trading despite all the operational security. The thing is, you can encrypt your communications, but you cant encrypt your trades. The pattern of profitable trades before announcements still exists. The relationship between the trader and someone with inside information still exists. The data analysis dosnt need to read your messages – it just needs to connect the dots.

In another case, Netflix engineers were trading based on subscriber growth data before earnings announcements. They used encrypted messages and cash kickbacks to try to avoid detection. The Market Abuse Unit identified there trading pattern as “improbably successful.” When someone is consistantly profitable on trades made right before material announcements, the math just dosnt work without inside information. The SEC dosnt need to prove exactly how you got the information – the statistical improbability of your trading success is itself evidence.

What Your Broker Already Told Them

Many people think they can hide insider trading by using obscure brokers or offshore accounts. This fundementally misunderstands how the system works.

Every broker-dealer in the United States is required to maintain “bluesheet data” – detailed records of every trade including customer identity, trade details, and timestamps. When the SEC opens an investigation, they can compel this data electronically. Theres no discussion, no negotiation. The broker has to provide it.

This means every trade you have ever made through a U.S. broker is already in a format that can be instantly transferred to SEC investigators. Using a friends account dosnt help – the SEC will trace the money and identify the beneficial owner. Using multiple accounts dosnt help – ARTEMIS is specificaly designed to identify coordinated trading across accounts.

If your trade touched the U.S. financial system at any point, there is a record of it that the SEC can access.

The 18-Month Time Bomb

One of the most dangerous aspects of insider trading detection is the time delay. You might make a trade in January 2024, and not hear from the SEC until July 2025 or later. This creates a false sense of security that gets alot of people in trouble.

Heres why investigations take so long. First, FINRA conducts initial analysis and generates a referral. Then the SEC opens an investigation and requests bluesheet data. Then investigators analyze the trading patterns and identify potential subjects. Then they issue subpoenas for documents and testimony. Then they build a case. This process takes 18 months to three years or more.

During all this time, the person being investigated usualy has no idea. They made there trade, they made there profit, nothing happened, so they assume they got away with it. Maybe they do it again. By the time the SEC shows up with questions, they might have commited the same violation multiple times – which makes the case against them much stronger.

The slow pace of enforcement isnt a bug, its a feature. The SEC has years to build there case while your sitting there thinking everything is fine.

The Whistleblower Factor

Technology isnt the only way the SEC catches insider traders. Sometimes the easiest path to detection is the simplest one: someone tells them.

The SEC Whistleblower Program pays rewards of 10-30% of sanctions collected in cases over $1 million. As of fiscal year 2024, the SEC has awarded almost $2.2 billion to nearly 444 whistleblowers. Thats real money going to real people who turned in there colleagues, friends, and family members.

Think about the implications. If you tell your spouse about your insider trade, you have just created a potential $100,000+ incentive for them to turn you in. If you brag to a coworker, same thing. If your buddy at the company who gave you the tip gets cold feet, they might decide to cooperate with the SEC before you do.

The whistleblower program dosnt just help the SEC catch insider trading – it makes every person you tell about your trade into a potential threat. The more people who know, the more likely someone is going to calculate that the reward money is worth more then your friendship.

Red Flags That Trigger Investigation

So what actualy catches the SEC’s attention? Here are the patterns that the surveillance systems flag:

First-time trading in a stock. If you have never traded a particular company’s stock before, and suddenly you buy a significant position right before a major announcement, thats a major red flag. ARTEMIS specificaly looks for traders with no history in a stock who suddenly appear with well-timed positions.

Unusual options activity. Options trading before announcements is especialy suspicious because of the leverage involved. If someone buys out-of-the-money call options right before positive news – which would normaly be a risky bet – and then cashes out after the announcement, the improbability of that success raises questions.

Coordinated trading across accounts. If multiple accounts that appear unrelated all make similar trades at similar times, the systems will flag the coordination. This includes accounts held by family members, shell companies, and friends.

Geographic or social connections. If you work at the same company as someone with inside information, or you went to school with them, or you live near them, those connections can be mapped. The SEC dosnt need to prove exactly how information passed – circumstantial evidence of relationship plus suspiciously timed trading can be enough.

Improbably successful trading records. If your pattern of trading is consistantly profitable in ways that beat statistical probability, thats itself evidence of potential wrongdoing. The SEC can bring in statisticians who will testify that your track record is too good to be luck.

When Your Trading Partner Flips

Many insider trading schemes involve multiple people. Someone at the company shares information with someone who trades, maybe that person shares with others. When the SEC investigates, they usualy catch one person first – and that person faces enormous presure to cooperate.

Federal securities violations carry serious penalties. When someone is looking at years in prison and millions in fines, the offer to cooperate starts looking very attractive. If your trading partner decides to tell the SEC everything in exchange for leniency, your suddenly exposed by someone who knows exactly what happened.

This is why insider trading conspiracies tend to unravel. The SEC dosnt have to catch everyone simultanously – they just have to catch one person and offer them a deal. From there, cooperating witnesses provide testimony, documents, and context that makes prosecuting the others much easier.

The more people involved in your insider trading, the more people who can potentialy turn on you.

Can You Actually Get Away With It?

Lets be honest about this question. Not every instance of insider trading gets detected and prosecuted. The SEC has limited resources and must prioritize cases. Small trades might not attract attention. One-time violations by people with no pattern might slip through.

But “might not get caught” is very different from “cant get caught.” The surveillance systems capture everthing. The data sits in databases for years. A trade that seems safe today could become the subject of an investigation three years from now when someone else gets caught and decides to cooperate.

The people who get caught often thought they were being careful. They often had years between the trade and the investigation. They often thought the matter was over. And then they got a call from the SEC’s enforcement division.

Is insider trading sometimes undetected? Probly. Is there any way to know in advance wheather yours will be? Absolutly not. The surveillance systems are designed specificaly to catch people who think there being careful. The only reliable way to avoid SEC enforcement is to not commit insider trading in the first place.

How Investigations Develop Over Time

Understanding how SEC investigations progress helps explain why people get caught years after there trades. The process is methodical and builds over time.

Phase 1: Automated Detection. ARTEMIS or SONAR flags suspicious trading activity. At this point, no human has looked at your case – its just data in a queue of potential investigations. Thousands of trades get flagged every year.

Phase 2: Initial Review. FINRA investigators or the SEC’s Market Abuse Unit conducts preliminary analysis. They look at the trading pattern, the timing relative to public announcements, and any obvious connections between the trader and people with access to inside information. Most flagged trades get cleared at this stage – the trading might have been coincidental or explainable.

Phase 3: Formal Investigation. If the preliminary review looks suspicious, the SEC opens a formal investigation. Now they start issuing subpoenas for documents. Your broker recieves a request for bluesheet data. Companies involved in the underlying transactions recieve requests for information about who had access to material information. Your phone records, email records, and travel records might all become targets.

Phase 4: Witness Interviews. Investigators start talking to people. Co-workers, friends, family members – anyone who might have information about how you learned what you knew. This is often when other people involved in the scheme start thinking about cooperation.

Phase 5: Case Development. The SEC assembles there evidence and decides wheather to bring charges. They might offer settlements. They might make referrals to the Department of Justice for criminal prosecution. By the time you hear from them directly, all of this groundwork is already done.

The whole process can take two to three years from the original trade. During that entire time, you have no idea your being investigated. You might make more suspicious trades. You might destroy evidence. You might talk about what you did with other people – creating more witnesses. All of this just makes the eventual case against you stronger.

What Happens If Youre Under Investigation

If the SEC contacts you about potential insider trading, the situation is already serious. They dont reach out casually – by the time they make contact, they have already done significant investigation. They know your trading history. They probly know your connections to people with inside information. They may already have testimony from cooperating witnesses.

At this point, you need an experienced securities defense lawyer immediatly. Anything you say to investigators can and will be used against you. The decision wheather to cooperate, wheather to invoke your rights, and how to respond to subpoenas requires expert guidance.

The penalties for insider trading are severe. Criminal cases can result in prison time – up to 20 years for securities fraud. Civil cases involve disgorgement of profits plus penalties that can be three times the profit made or loss avoided. Career consequences usualy include being barred from the securities industry permanantly.

The best time to think about these consequences is before you make the trade, not after the SEC comes knocking.

The Bottom Line on SEC Detection

The SEC’s ability to detect insider trading has increased dramaticaly over the past decade. The combination of ARTEMIS, MIDAS, SONAR, and the whistleblower program creates a surveillance net that captures far more suspicious activity then most people realize. Add in the cooperation dynamics when multiple people are involved, and the odds of getting away with insider trading over the long term are worse then ever.

Every trade you make is recorded. Every connection between you and people with inside information can be mapped. Every profitable trade before a major announcement sits in a database waiting to be analyzed. The SEC might not investigate every suspicious trade, but you have no way of knowing wheather yours will be one they pursue.

The smartest traders, the ones who use encrypted messaging and shell companies and careful timing, still get caught. Not because they made obvious mistakes, but because the data analysis is simply to powerful to evade reliably. The only strategy that consistantly works is not to commit insider trading in the first place.

If your reading this because your thinking about trading on inside information, understand what your up against. If your reading this because you already did and your worried, talk to a securities lawyer before you talk to anyone else. Either way, the SEC’s surveillance systems are watching – and they have a very long memory.