Flagged by an Algorithm? What AI Surveillance of Insider Trading Means If the SEC or FINRA Comes Calling

By Mark J. Astarita, Esq., Sallah Astarita & Cox, LLC

This commentary is general information, not legal advice. Rules and their interpretations change; check the current rules or consult counsel before acting on anything here.

A recent article on Mondaq, “Can The SEC Use AI To Detect Insider Trading? How SEC And FINRA Algorithms Flag Suspicious Trades,” by David Chase of the Law Firm of David R. Chase, asks a question I hear from clients more and more often: is a computer watching my trades? The short answer is yes. But as the article stresses, an algorithmic alert is not proof that anyone did anything wrong.

What the Article Says

The article makes several points worth repeating:

• Regulators are using sophisticated technology. According to the article, the SEC and FINRA use sophisticated technology and data analytics, and increasingly AI-related tools, and modern surveillance systems can spot unusual trading patterns, compare trading with material news events, and analyze relationships among traders.
• Surveillance is a triage tool. The author describes AI and analytics as a “detection and triage mechanism”: the computer identifies a pattern, and human investigators decide what it means.
• Many patterns can trigger a review. The article lists examples such as trading shortly before a significant announcement, an unusually large position compared with the trader’s normal activity, buying short-term options for the first time, large profits on out-of-the-money options, trading by people connected to insiders, and trading in related accounts.
• Innocent trades get flagged too. In the article’s words, “an algorithmic alert is not the same as evidentiary proof of illegal insider trading,” and a trader “can attract regulatory scrutiny even when a trade is made completely lawfully.”
• The investigation is about context. Investigators want to know what the trader knew, when, and how, and they look at brokerage records, emails, texts, phone records and relationships with insiders.
• Rule 10b5-1 plans help, but they are not a free pass. The article notes that a properly structured and administered plan may provide an affirmative defense, but regulators will still examine how it was adopted, modified and followed.

I agree with all of this, and I want to add some perspective from the defense side.

What the Surveillance Actually Looks Like

In its own words, FINRA’s Insider Trading Detection Program “uses sophisticated technology and analytics to monitor 100% of trading in stocks, options and bonds for potentially suspicious activity around material news events” (FINRA Unscripted, May 2024). FINRA has also said that its investigators get information “from companies and FINRA firms involved in the events leading up to material news announcements,” and that the program produced more than 450 referrals in 2023 (FINRA blog, April 2024).

In practice, the process usually works like this. A deal, earnings surprise or other market-moving event is announced. The surveillance looks back at who traded beforehand. Regulators then collect detailed trade data from the brokerage firms. That data is the “blue sheet.” FINRA Rule 8211 (text) and the SEC’s Exchange Act Rule 17a-25 (text) require broker-dealers to provide, on request, transaction details along with the customer’s name, address, tax ID number and whether the order was solicited. FINRA’s version also asks for the customer’s employer. FINRA also sends information requests to the companies involved in the deal and tries to connect the people who traded to the people who knew about the deal before it was announced.

So by the time anyone contacts you, regulators already know who traded, how much and when. What they don’t know yet is why.

A Flag Is a Question, Not a Conclusion

This is the point I emphasize most with clients. People trade before news all the time for legitimate reasons: their own research, a broker’s recommendation, a need for cash, a tax strategy, a long-standing pattern of buying. The algorithm sees none of that. It sees timing and profit.

To bring an insider trading case, the government has to prove much more than a well-timed trade. As the Mondaq article puts it, the critical question is “whether the evidence establishes that the trader possessed and used material nonpublic information.” A flag starts an inquiry. It does not prove anything.

That said, I never tell a client that an inquiry is “routine” and can be ignored. How you handle the first contact can decide how the matter ends.

If You Receive an Inquiry Letter or Request

The first contact can take several forms: a letter from your broker-dealer’s compliance department asking about a trade, a FINRA request under Rule 8210, or a voluntary request or subpoena from the SEC staff. For registered representatives and firms, a FINRA Rule 8210 request is not optional. The rule states that no member or person “shall fail to provide information or testimony” when properly requested. Ignoring one can be a separate violation, regardless of the underlying trade.

Here is my practical advice:

1. Don’t respond without counsel. That includes the “quick phone call” to explain. The article makes the same point: a casual explanation that turns out to be incomplete or inaccurate can create inconsistencies, or even be treated as untruthful. Whatever you say first will be compared against every record regulators have.

2. Preserve everything. Don’t delete emails, texts, messaging-app chats, notes, research or account records, even ones that seem irrelevant or embarrassing. Destroying documents after you learn of an inquiry can turn a defensible trade into a far more serious problem.

3. Don’t talk to others about the trades or the inquiry. Don’t call the friend at the company, the relative who also bought, or a colleague to “compare notes.” Those conversations can be discoverable, and they can look like coordination. FINRA’s own blog describes a case where FINRA sent information requests to the companies in a merger. A manager who worked on the deal talked about the request with a colleague and then with her husband, who confessed to her that he had bought shares based on information he overheard or that she shared with him. The company’s outside counsel told FINRA, which referred the matter to the SEC and the FBI. He later pleaded guilty (FINRA blog).

4. Document the legitimate reasons for your trades, with your lawyer. If you bought because of public research, a long-standing strategy or a broker’s call, the best evidence is contemporaneous: notes, emails, research reports, order history, a pattern of similar trades. As the article notes, a contemporaneous document is often far more reliable than a memory reconstructed months later. Gather it with counsel so it is accurate and protected.

The Bottom Line

As surveillance improves, more lawful trades will be flagged. That is not cause for panic, but it is cause for care. A flag is the start of a conversation with regulators, and you want it handled correctly from the first word.

If you or your firm have received a FINRA or SEC inquiry, a Rule 8210 request, or a compliance letter about trading activity, contact me at Sallah Astarita & Cox, LLC to discuss your situation confidentially.

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Sallah Astarita & Cox, LLC
(212) 509-6544
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