Using tech to crack down on insider trading: Sebi's Madhabi Puri Buch

Chairperson Madhabi Puri Buch says developing algos to identify mis-selling and other violations

The Securities and Exchange Board of India (Sebi) is working on various ways to crack down on serious offences such as front-running and insider trading using sophisticated data and technology. The market regulator has increased the use of data and analytics for surveillance and regular inspections, Chairperson Madhabi Puri Buch said at an event organised by IIM-Bengaluru on Friday.

By application of simple logic and in-house software, Sebi is able to identify insider trading and front-running too, she said.

“Algos can detect whether the front-running is at the mutual fund level or at the brokers’ end. If the trades of the same mutual funds are being front-run, then obviously the leak is at the mutual fund, and if the trades of multiple mutual funds are being front-run, then the leak is at brokers’ end,” Buch explained.

Currently, with the help of 80 algorithms, the market regulator inspects data collected from mutual funds to identify violations. All data is run through these algorithms every quarter to inform each mutual fund of the various instances of violations and the penalties to be paid.

“The industry can develop its own algorithm based on regulations and logic we have provided so that they can track it themselves. We do the exercise quarterly as we want to give time to the industry to find their own mistakes and fix them,” Buch said.

Buch said that earlier insider trading was being carried out in the spouse’s account, which later moved to the mother’s, mother-in-law, and brother-in-law’s account. With the use of call data records, Sebi was able to establish patterns. Sebi’s drive against insider trading will be further strengthened by changes to the regulations, which are in the works, she said.

“Now with WhatsApp and vanishing messages on WhatsApp, it is a problem. Regulation will be one step behind technology, but hopefully not too many steps behind. The idea is to make such violations harder,” she said acknowledging the challenges that have come up with evolving modus operandi.

Moreover, to identify cases ranging from mis-selling of schemes to other violations in spirit of the law, Sebi is developing various softwares.

“This is just the beginning. How to develop algorithms to catch violations in the spirit of the law and not just the letter of the law is what we are engaged with at the moment, and hopefully in a few months we will have something to show,” Buch said.

The chairperson said that the objective of the regulator was to prevent people from doing bad, and not just to catch them. The regulator is looking at reengineering data and analytics for risk and cost reduction, and to improve ease of doing business.

Addressing the impact of ‘finfluencers’, or social media influencers, engaging in financial advice, Buch said that there were rules for investment advisory, but a line needed to be drawn in these matters as Sebi couldn’t interfere unless there was a contract in place.

Underscoring the reach of technology, Buch said 93 per cent of onboarding for new demat accounts was being done through e-KYC, which was helping brokers reach Tier 4 and Tier 5 cities.

When asked if co-location facility was putting retail investors in a disadvantageous position, she said, “Long-term investors don’t really need co-location. If someone needs co-location, they are not an investor but a trader. There is an account aggregator model available for a retail trader wanting to avail co-location facility provided by the exchanges.”

Safeguards from cyberattacks in the works

Sebi, along with exchanges and depositories, is working on a new framework to safeguard the market from cyberattacks. The new system, which is expected to go live by March 2023, will be the first of its kind, said Buch. At present, the system is more equipped to handle hardware-related failures. The new system will protect the stock market infrastructure from software attacks and data contamination by transferring data from one exchange to the other.

“The data of every client position and collateral which is there on Exchange A will go to a storage box next to Exchange B’s data system. If Exchange A goes down and Sebi determines that this is on account of a cybersecurity attack. Further, if it is not possible for the disaster recovery site to come up on time, then that data will be uploaded on Exchange B. Now every participant will be able to operate on this exchange, as though they were operating on Exchange A,” Buch said.

Sebi extends ETF threshold deadline of Rs 25 cr till May 1

Sebi has again shifted the deadline for implementing the Rs 25-crore threshold for direct exchange traded fund (ETF) transactions with asset management companies (AMCs). The rule will now be applicable from May 1, 2023 instead of November 1, 2022. The regulation is aimed at enhancing liquidity at exchanges by ensuring that all transactions below Rs 25 crore in ETFs happens only through exchanges. (Abhishek Kumar)