Decoded: How does front-running work, and what is Ketan Parekh's role?

Front-running is a fraudulent practice where traders use advance knowledge of large client orders for personal profit, as seen in Ketan Parekh's case

India’s market regulator, the Securities and Exchange Board of India (Sebi), has uncovered a sophisticated front-running scam involving Ketan Parekh, a notorious stock market manipulator, and Singapore-based trader Rohit Salgaocar. The investigation revealed that the scheme exploited non-public information (NPI) from a major US-based foreign portfolio investor (FPI), referred to as the “Big Client.”

 

How did Ketan Parekh’s front-running scheme unfold?

 

According to Sebi’s findings, Parekh and Salgaocar leveraged insider information about the Big Client’s large stock transactions to execute fraudulent trades. Salgaocar acted as a key intermediary, passing sensitive trade data to Parekh, who then used it to orchestrate manipulative trades despite being banned from trading for 14 years following his involvement in the 2001 stock market crash.

 

 

The operation also involved six entities, referred to as frontrunners, who carried out trades based on the leaked information. Sebi’s probe found that trades for the Big Client were routed through Nuvama Wealth Management and Motilal Oswal Financial Services, as Salgaocar had a referral agreement with these brokerages.

 

The scam, active between January 1, 2021, and June 20, 2023, was exposed after Sebi noticed unusual trading patterns linked to the 'Big Client'. The regulator conducted a three-day search and seizure operation across 17 locations in June 2023, gathering documentary and electronic evidence to substantiate its case.

 

What is front-running?

 

Front-running is a fraudulent practice where traders exploit advance knowledge of large client orders for personal profit. Brokers, asset managers, or insiders gain access to confidential trade information and use it to make preemptive trades, profiting from subsequent price movements caused by the client’s orders.

 

For example, a broker aware of a client’s impending bulk purchase might buy shares at a lower price and sell them at a higher price after the order inflates the stock value. This tactic undermines market integrity, erodes investor trust, and is illegal in most jurisdictions.

 

How does Sebi identify front-running?

 

Sebi employs advanced technology, including algorithms, data analytics, and communication surveillance, to detect front-running and insider trading. Mule accounts are often used to conceal illicit activities, but the regulator uncovers connections through digital communication trails like emails and messaging apps.

 

What are other prominent front-running cases under Sebi’s scanner?

 

The Ketan Parekh case is part of Sebi’s broader crackdown on fraudulent practices in India’s financial markets. In 2023, Axis Mutual Fund manager Viresh Joshi and 20 others were barred after earning Rs 30.55 crore through front-running. Quant Mutual Fund also faced similar allegations that year.

 

Other cases involving entities like NNM Securities Ltd, CHL Stocks Concepts, and companies such as Wockhardt and Bank of India AXA Mutual Fund are currently under review by the Securities Appellate Tribunal (SAT).

 

How is Sebi tackling front-running cases?

 

To strengthen oversight and deter such practices, Sebi has introduced amendments to mutual fund regulations. These include mandatory recording of all communications by dealers and fund managers during market hours, with face-to-face interactions being the only exception. Additionally, asset management companies (AMCs) are required to establish institutional mechanisms to detect and prevent front-running.

 

The measures, approved during Sebi’s April 2024 board meeting, aim to enhance accountability and ensure greater compliance across the financial ecosystem, safeguarding investor interests and maintaining market integrity.