As India continues to follow a strong exchange self-regulatory organisation (SRO) model (where Sebi is the primary regulator, relying on stock exchanges to perform regulatory functions extending beyond their market operations), stock exchanges continue to remain the first level regulator for detecting market manipulations. Sebi is required to be immediately informed of any doubtful movements, based upon which it may enquire, investigate and if required, take appropriate actions. Sebi on its own can also initiate an action based on the information gathered from other regulators, media, stakeholders or through its Integrated Market Surveillance System (IMSS) introduced around five years back.
Sebis IMSS provides useful assistance in monitoring the markets and helps in finding deviances, analysing aberrations and leaves it to Sebi to identify the suitable cases for carrying out investigation and taking further action. But since the inception of IMSS and as also evident from the the recent annual report for the year 2009-10 published by Sebi, a need was felt to complement it with an additional system that could provide a better handle to investigations. This has been done by launching the DWBIS, which will integrate data available from stock exchanges and depositories into a single integrated data warehouse. DWBIS is likely to serve Sebi in a better way by assisting in identifying and investigating market manipulations. These are still early days and over the next one year, the new platform is likely to host pattern recognition algorithms, which will assist in identifying networked clients collectively indulging in manipulations.
Now there is a need to examine as to why, despite having one of the best technology and surveillance mechanisms in the world, the systems are not effective and culprits frequently escape convictions or there is an inordinate delay. This is because the core issues still remain unaddressed. We can apply technology and look for solutions, but this is not an automatic process, as unfortunately the technology can only help to an extent because decision making still lies with Sebi. Lets examine the concerns. First, availability of information on a near time basis and not on a real time basis. Second, delay in execution of the available information. Third, stringent laws on paper but impracticality resulting in fewer convictions or inordinate delays.
The wrong has to be discovered immediately and not merely on a near time basis so that a manipulation is discovered promptly and requisite repair work is done. This would help the investors cause who would not continue to be impacted by the manipulators.
Sebi may technically be said to have more central and real-time surveillance systems than its US counterpart, the SEC. But delayed investigations and even more delayed findings vitiate the system. The recent front-running matters involving officials in two asset management companies pertained to the trading periods of 2007 or 2008, way before the final orders were made in 2010. What is required is efficient execution. The new systems and tools would prove to be helpful only in an event the execution is prompt.
There is a need to have strict but practical laws catching the front-runners, insider traders and other types of manipulators. Greater purpose would be served if we have laws that are more rational and reduce the unnecessary hassles obstructing and delaying the necessary convictions. The investigations need to be quick rather than running into years. There is also a growing need to keep a track of a large number of off-market transactions taking place outside the market systems. The infamous flash crash of May 6, 2010, in the US market highlighted a need for having a more centralised and quicker surveillance mechanism. The SEC proposed adoption of consolidated audit trail with FINRA (Financial Industry Regulatory Authority), given the responsibility of tracking trades in all listed US securities. In India, we dont have the problem of scattered trades as is in the case of the US, but what we probably dont have is the effective monitoring and expeditious execution.
With the introduction of DWBIS, the scope of surveillance will widen and are likely to unearth smarter manipulators, provided the concerns identified above are addressed. The new system should act as an ECG, but imagining that a good doctor is no longer required would create a false sense of security.
The authors are with Finsec Law Advisors