Open-Market Transaction

An open-market transaction is an order placed by an insider, after all appropriate documentation has been filed, to buy or sell restricted securities openly on an exchange.

This 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.

Insiders must report such transactions with the SEC and include relevant details about the sale or purchase of the shares. 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.

The insider might want to take advantage of profits their investment has accrued. The insider may have weighed long-term considerations about the company or industry that prompted the sale of those shares. Similar might be said about the acquisition if more shares in the company. It is not uncommon for outside investors to emulate the open-market transactions of insiders by changing their own positions in response.

Companies might issue press statements about open-market transactions that involve prominent insiders or account for large numbers of shares in the company. If a chairman 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.

In a separate context, an open-market transaction can refer to a deal conducted at arm’s length between two parties. This usage is particularly related to the sale or merger of a business interest or assets.

Open-market transactions differ from central banking programs known as open-market purchase operations. Under such programs, the Federal Reserve purchases or sells government securities such as bonds in the open market alongside investors. Such an operation is an action of a monetary policy. Open market operations are used to regulate interest rates and liquidity in the economy. Such action might be put to extensive use during or after a financial crisis for example.