| Insider trading is a type of immoral activity based on information advantage. The activity not only infringes on the interest of small to mid size investors, but also damages the resource allocating function of security market by distorting market price being the reflection of real value. Consequently, it attracts widely attention from jurisprudents and economists all over the world.China's stock market is a developing market. The market structure and mechanism remained to be perfected, that caused much insider trading. Compared to foreign experiences, insider trading in China stock market has its own characteristics, such as ubiquitousness, invisibility, diversity of the subject of trading and relevance to other illegal activities. Because of the complicated forms of security crime and the lag of law system building, many difficulties, such as hardly being prosecuted and high regulation cost, appeared in the process of implement security law to combat insider trading. Therefore, a systematic research of insider trading activities and its regulation mechanism has great significance not only to the efficiency and structure improvement of the market, but also to the persist development of economy.Concerning the above situation and aiming at the early warning and best treatment of insider trading, this paper study the characteristics of insiders'action, the optimal regulatory strictness, the technique of real time monitor, and the behavior screening system of insider trading. In the process of research, different methods are used, such as theory model, empirical test and case study. The results of the paper are hoped to be useful references for the regulators in the fields of anti-insider-trading by financial econometrical methods and the rule making of insider trading regulation in China.Four parts construct the body of the paper. In the first part, the trading strategies and final return of insiders and the regulator's optimal strategy are studied. The results not only support the necessity of insider trading regulation, but also suggest different regulation intensities in different market condition. In the second part, a three-step pattern of insider trading regulation ("warning-screening-investigation") is suggested and the real time monitor and behavior screening system of insider trading are constructed. In the third part, the calculation of insider's abnormal returns is discussed, which is relating to the identity problem of illegal gains arising in the process of insider trading punishment. In the last part, some advices are proposed based on the results of the first three parts.In order to analyze the characteristics of insiders'action and the optimal regulation strategy of regulators, this paper constructs a one period model including regulators based on the theory models in Kyle (1985) and Miu & Zou (2004) by using a measure of regulatory strictness introduced by Jhinyong Shin(1996). The new model assumes that the insider has incomplete information and the market has an extent bias to the semi-strong efficiency condition. By doing this, it overcomes the two major problems of Miu & Zou (2004). The results suggest that both of the return and aggressiveness of insider are related to the usefulness of his private information. The regulators should use different strictness in different markets. Neither not supervising insider trading at all nor always supervising it strictly is the optimal strategy.In order to actualize the in-time early warming of insider trading, the paper studies the activity from the aspect of information arrival and dynamic jump character and constructs a real time monitor system of insider trading based on GARJI model, which was proposed by Maheu and McCurdy (2004). By dynamic monitor the probability of inside news arrival and the raise or fall extent of each stock, the system is able to sent two types of alarm signals automatically to trading stocks, one is low, the other is high, which achieves the automatic verification and real-time monitor of insider trading through the signal of price and volume.For the sake of a further judgment of the suspect stocks, the paper searches the characters of insider trading stocks from the four aspects: market performance, micro structure, corporate governance and financial status, and constructs a compact and efficient screening model of insider trading. Two indexes of an individual stock, the time of reaching raising limit and the days for fully adjustment, are firstly used in this model. The correct ratio of identification in Logostic model and Probit model are both achieve a high level of 97.14%. Using the method of case study, we carry out a simulation monitor on eight stocks, such as Hangxiaoganggou and Yanbiangonglu. The cases successfully prove the effects of the real-time monitor and behavioral screening system.In order to find an efficient and easily-handled way to account the illegal gain of insider in the process of insider trading punishment, the paper compares four common calculation ways of abnormal returns and analyses the PPD method in empirical test. The results support to maintain the status quo, viz. calculating abnormal return of insiders as their actual return.In the end, some proposals on legislation, institution and technique are given to the regulation of insider trading.
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