‘axis Mf Not Only Case Of Front Running Being Probed By Sebi’

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Axis Mutual fund is not the only case the Securities and Exchange Board of India (Sebi) is probing following allegations of fund managers and dealers front running stocks. The regulator is investigating at least three other cases, said a senior Sebi official.

Front running is the practice of trading in securities ahead of large client orders.

Sebi’s increased scrutiny of the so-called front running by fund managers and dealers is largely because of the changes in surveillance norms to adapt to new ways manipulators are gaming the system and evolving methods of fraud, the official said.

Besides being a serious securities market offence, it can affect the net asset value (NAV) of a fund as the trades in securities would have already run up the stock, making it expensive for the fund to buy and thereby affecting the NAV and leading to losses or inferior prices for customers. People with information about the trades end up making outsized gains.

“Front-runners would at one time use own accounts or those of their families to trade. This later changed to using the accounts of insider’s brother-in-law as they are not defined as connected persons under the companies act. However, in the latest twist to this method, fraudsters are using ‘accounts for hire’,” said the Sebi official.

These tend to be KYC-compliant accounts of real individuals who are willing to hire out their accounts for a fee. Some of them are also high net worth individuals and it is possible to rent as many as 300 accounts in just two days, the person said.

If a front runner is using 300 accounts to trade in small quantities it is almost impossible to detect since most of the surveillance will look at trades which would be equivalent to a trade placed by an institutional investor.

“Sebi made the mistake of thinking too small at first. It would assume that the institution’s trade would be large and the front runner’s trade will be more or less the same size. Sebi worked on removing that myth since the front runner would operate through multiple accounts in small quantities. The new algo looks at smaller trades ahead of big trades and narrows down on the pattern,” said the official.

The algo was developed 2-3 years ago and is equipped to catch the new modus operandi. Sebi has detected multiple instances of front running. These are being investigated and detailed orders will be passed outlining the modus operandi soon, the official said. “These orders will lay the groundwork for the regulator to seek more powers equivalent to those available to enforcement agencies.”

ED and IT have the powers to seek whatsapp and other social media chat records that Sebi does not have. Now market manipulators use Whatsapp, Signal or Telegram. “Once some of the orders come into the public domain Sebi will be in a position to demonstrate that in this digital age, fraud and fraudsters have become sophisticated and to catch them the regulator needs adequate tools,” the official said.

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