Open-Market Transaction

What Is an Open-Market Transaction?

An open-market transaction is an order placed by an insider, after all of the appropriate documentation has been filed with the Securities and Exchange Commission (SEC), to buy or sell restricted securities openly on an exchange.

An open-market transaction is a legal way for an individual with insider information of their company to trade securities without violating insider trading laws.

Key Takeaways

  • An open-market transaction refers to the buying or selling of shares in a company by insiders of that company.
  • When enacting an open-market transaction, an insider has to fill out the appropriate paperwork with the SEC to avoid violating any insider trading laws.
  • When open-market transactions occur, outside investors pay attention as the purchase or sale of securities by insiders can indicate the outlook of the company.
  • More interest is placed on the buying of shares by insiders than the selling of shares.

Understanding an Open-Market Transaction

The SEC defines an insider as "an officer or director of a public company or an individual or entity owning more than 10% of a company's stock."

When insiders are buying or selling their own company's stock, investors pay attention as it provides insight into what is occurring within the confines of the company that outsiders are not privy to.

Are insiders selling their shares because earnings were drastically below estimates and they expect the share price to fall? Are insiders buying shares because they created a successful new product that will send the share price skyrocketing?

The trading actions of insiders is an indicator of how the stock will perform in the future. But before they can buy or sell their shares, known as open-market transactions, they must file the correct paperwork and follow all procedures.

The Process of an Open-Market Transaction

An open-market transaction is simply an order placed by an insider to buy or sell shares according to the rules and regulations set out by the SEC. The importance of an open market order is that the insider is voluntarily buying or selling shares at or close to the market price. There is no special pricing involved in open-market transactions.

Insiders must report open-market transactions with the SEC and include relevant details about the sale or purchase of the shares. Because the reason for the transaction is given, the filings of open-market transactions might be used by other investors to gain some perspective on what insiders may believe about the company.

For example, if an insider sells a considerable portion of their shares through an open-market transaction, the reasons listed with the filing could cause other investors to change their portfolios in response. If the reason was simply to take advantage of stock options provided to a high-level officer, outsider investors will most likely not react.

In fact, more importance is given to the purchase of shares rather than to the sale of shares as a sale could be done for many reasons.

SEC Form 4 needs to be filed by an insider before buying or selling shares. Form 4 lists information such as "the name of the insider, their relationship to the company, how many shares were traded, and at what price."

Why Open-Market Transactions Are Made by Insiders

There are many reasons that insiders would buy more shares or sell their current shares. As stated above, buying shares is more insightful as it indicates a belief in the success of a company.

The selling of shares can be done for many reasons, as simple as that the shareholder needs cash and the insider wants to take advantage of profits their investment has accrued.

Conversely, the insider may have weighed long-term considerations about the company or industry that prompted the sale of those shares. The same could be said about the purchase of more shares in the company.

When certain open market transactions occur, companies might issue press statements about the open-market transactions that involve prominent insiders buying shares. For example, if a chair buys one million shares in their own company, an accompanying statement could declare this is an affirmation of faith in the management.

The purchase price of those shares will also be listed. There might also be a reference to how many shares in the company the insider will own after the transaction is complete.

Open Market Operations

It is important to note that open-market transactions differ from central banking programs known as open market operations. Under such programs, the Federal Reserve purchases or sells government securities, like bonds, in the open market alongside investors.

Open market operations are used as a form of monetary policy to control the money supply by impacting interest rates and liquidity in the economy. This action is typically used during or after a financial crisis.

Article Sources
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  1. AAII. "An Investor's Guide to Corporate Insider Trading Activity." Accessed Dec. 7, 2020.

  2. Insider Insights. "Insider Trading News, Insider Monitor, Insider Buying." Accessed Dec. 7, 2020.

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