The Securities and Exchange Board of India (Sebi) is developing algorithms to track front-running and insider trading as data and analytics become crucial for surveillance, said Madhabi Puri Buch, the regulator’s chairperson, on Friday.
“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,” she said at an event organised by Indian Institute of Management – Bangalore, referring to various kinds of misconduct.
With the help of 80 algorithms, the market regulator inspects data collected from the mutual funds to identify violations. The data is run through these algorithms every quarter to inform each mutual fund of violations and the penalties to be paid.
“The industry can develop their own algorithm based on the 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.”
“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, adding that the regulator’s objective is to prevent people from misconduct, and not just to catch them.
Sebi is using data and analytics for risk and cost reduction along with enhancing ease of doing business. In policy making, data and analytics are being used to test and identify the entities and people it will impact.
To ensure work is not affected in an event like a cyberattack, the regulator will by March 2023 put in place a system enabling data storage of all trades between stock exchanges. Sebi is working with depositories and exchanges for this system, a first of its kind in the world.
“We are now mitigating against software risk. All the data of every client position and collateral which is there on exchange A is online going 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 cyber-security attack, and it is not possible for the disaster recovery site to come up on time, then that data will be uploaded one exchange B. Now every participant will be able to operate on this exchange as though they were operating on exchange A,” Buch said.
Buch acknowledged the challenge of keeping up with the technology and how it is used for violations. “… 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.
About ‘finfluencers’, or social media influencers engaging in financial advice, Buch said that there are rules for investment advisory but a line needs to be drawn in these matters as unless there is a contract in place, Sebi cannot interfere.
With the regulator promoting digital acceptance, 93 per cent of all on-boarding for new demat accounts is being done through e-KYC.
Tech at Sebi’s aid
– Data and analytics helping track front-running, insider trading
– Algorithm in works to identify mis-selling and misconduct
– Modus operandi of violators becoming smarter, WhatsApp disappearing messages a challenge
– Engaging technology for risk reduction, cost reduction, and ease of doing business
– Need to draw a line with respect to ‘finfluencers’