What Is a Closed-Market Transaction?

A closed-market transaction is an order placed by a company's insider to buy or sell restricted securities from within the company's own treasury. Appropriate documentation must be filed before a closed-market transaction order can be placed.

Key Takeaways

  • A closed-market transaction is an order placed by a company's insider to buy or sell restricted securities from within the company's own treasury.
  • Appropriate documentation must be filed before a closed-market transaction order can be placed; documentation filed with the Securities and Exchange Commission (SEC) shows other investors that the transaction occurred.
  • With a closed-market order, the insider is buying or selling shares at a price above or below the market and directly from and to the company—rather than openly on the market.
  • A common example of a closed-market transaction is when an employee receives, as part of their compensation, stock options or shares in the company.

Technically, closed-market transactions are a form of legal insider trading; these transactions are placed by an insider according to the rules and regulations set out by the Securities and Exchange Commission (SEC). With a closed-market order, the insider is buying or selling shares at a price above or below the market and directly from and to the company—rather than openly on the market. These types of inside trades are generally not considered significant as they do not reflect the insider's sentiment towards the company. Such transactions don’t usually affect the price of securities offered on the open market.

Understanding a Closed-Market Transaction

Usually, closed-market transactions occur when an employee of a company trades shares or stock options in that company with the company itself. It is the opposite of an open-market transaction, in which an ordinary investor buys or sells securities on a securities exchange that is open to the public. A closed-market transaction, on the other hand, occurs between the company and the insider, with no other parties involved; it does not take place through the open exchange. Documentation filed with the SEC shows other investors that the transaction occurred.

Example of a Closed-Market Transaction

Employee Stock Options

A common example of a closed-market transaction is when an employee receives, as part of their compensation, stock options or shares in the company. Closed-market transactions do not necessarily reflect an insider’s feelings about or belief in the value of the stock or other securities being traded. Nor are they necessarily made voluntarily by the insider; they may be initiated by the company, which prefers to offer its employees stock options or stock as part of their compensation. Stock options are a benefit often associated with startup companies, which may issue them in order to reward early employees when and if the company goes public.

An insider may also buy stocks openly on the open market. This is not considered a closed-market transaction because the transaction is not conducted between the company and the insider. As long as appropriate documentation is provided, open-market transactions from company insiders are legal. As a voluntary transaction, an open-market transaction conducted by an insider can reveal that person’s feelings about the stock or its worth, and such a transaction can affect the stock’s market price.