The capital market regulator, Securities and Exchange Board of India (Sebi), is concerned about the usage of technologies for manipulating markets.?Recent trends in the type of investigation cases undertaken by the regulator indicate that technology and newer methods are being used by the violators of securities law? mentions the recently released Sebi annual report 2009-10.
The regulator felt the need to strengthen the existing systems and procedures to prevent fraudsters from violating securities law through usage of technology.
Of the cases referred to the investigation department, there has been a significant increase in the number of cases with alleged front running over the last two years. There were in all 13 cases of front running referred to investigation department in the last two years.
The regulator had been asking fund houses to install recording facilities in dealing rooms and disallow traders from using their personal mobile phones to enforce discipline and prevent front running in mutual funds.
Few months back, the regulator unearthed a massive front running of trade involving an employee of HDFC AMC and three other clients who successfully executed trades ahead of the orders of the fund house.
As front running involves leakage of information from sources such as the institutional client desk or brokers/ traders handling such institutional orders, Sebi feels that a proper investigation into these cases should help put in place a system so that the possibility of such institutions becoming sources for leakage of trading information is reduced in the future.
As part of its concerted efforts to check such cases of front running, the regulator in a letter to mutual fund players in July 2010, has directed that all dealing records be preserved for a period of eight years. Further, Sebi has asked asset management companies to ensure that the terms of reference of review of internal auditors are submitted to the board of trustees. Moreover, the capital markets regulator wants that AMCs ensure that the recordings are checked periodically by designated executives.
Sebi has further highlighted the importance of an effective Customer Due Diligence (CDD) regime, a thorough in-person verification process and continuous monitoring of transactions by registered intermediaries to check instances of market manipulation. This is in view of couple of instances of market manipulation whereby large number of persons (or front entities) were found to be used for perpetrating unfair and fraudulent trade practices in the market.