Buy-side tackles SEBI on front running, cautious on changes

A buy-side lobby group has approached the Indian regulator with concerns over front running on the subcontinent, citing data from its members.

The Asian Trader Forum (ATF) has approached the Securities and Exchange Board of India (SEBI) with its members’ concerns over front running in India, and with data collected from its members. The two groups have agreed to meet soon to discuss these concerns, although members of the ATF are cautious about being too optimistic of success.

“The thought among the foreigners is that the compliance and monitoring at the local brokers is very weak, so a lot of clients prefer to deal either only with the foreign brokers or they do some trades DMA [direct market access] or algo – so they don’t have to give up what they’re doing ahead of time,” said one Asian buy-side trader unaffiliated with the ATF whom wished to remain nameless.

The feeling from the buy-side is that information leakage is occurring both during the day from onshore brokers and after market close from custodians. An ATF survey of its members reportedly found over 90% of them considered front running in India to be a problem.

“A lack of trust in any segment of the market is not good, and there’s the feeling that local buy-side and sell side are quite active together; not really protecting client confidentiality,” said another trader, who noted that onshore brokers were willing to share the information because of concern that if they did not they would lose business. “I think the buy-side that may be asking for this information locally might not really appreciate how inappropriate such a request is.”

Hirander Misra, chairman of Forum Trading Solutions in the UK, adds that there could be a “severe” impact from this for traders, in terms of prices moving against them, both for going long or short, and the impact could be magnified across the range of securities that a trader is holding.

SEBI has responded to the ATF’s concerns with a request to meet. “We get the feedback that they’re willing to listen, but at the end of the day they’ll make their own decisions,” said one Hong Kong-based buy-side trader who noted that it was hard to gauge whether SEBI would change practices in the market. Though he added “they won’t shut the buy-side out.”

Misra believes SEBI will want to be seen to respond to the Asian Trader Forum’s questions. “Here you have a body posing some quite interesting questions and citing a dataset, so any jurisdiction that’s well regulated will want to look into that, and whether there is any hard evidence behind those concerns or whether it’s just perception.” He adds India will be keen to show its investigation and ensure confidence in the market, as it is working hard to attract foreign investment.

Misra also notes there is already a framework and mechanisms in place in India to deal with problems such as front running, with SEBI already having done substantial work in the 1990s to improve compliance. So rather than it being a case of needing new rules, it is likely to simply need stricter implementation to solve any problem. SEBI was founded in 1992 essentially to tackle issues like improper relationships between market participants.

There has been previous research, including a recent study by the Indian School of Business and the Institution of Management Technology, that did provide evidence of front running in India, particularly around small-cap stocks. This research found unusual price movements preceding block trades. However, Misra notes it can be very difficult to prove information leakage, with those responsible likely to avoid making records.

The traders are hoping SEBI can follow the lead of regulators in jurisdictions like Hong Kong and Singapore and be stricter in terms of compliance.

A spokesman for the Asian Traders Forum declined to comment, saying he preferred to give SEBI more time to prepare a response to the concerns of the AFT. The spokesman also said he was aiming for the two groups to meet before year-end.