Sebi ramps up surveillance to combat sophisticated insider trading

In view of the rising insider trading cases, the capital market regulator Securities and Exchange Board of India (Sebi) is overhauling its surveillance systems to clamp down the sophisticated manner in which such illegal acts are being carried out. In the past, company insiders or representatives would buy or sell shares based on insider tips. Now, they have started using intricate derivative strategies to evade the law along with making a quick buck. This has prompted the SEBI to create an in-house system to scan all derivative trades and send a warning regarding doubtful transactions, according to a report in The Economic Times.

The new system put in place by Sebi scans close to 20 million trades daily. You can directly ascertain the intent of purchase or sale by an insider or his proxies but with derivatives, it is really difficult to do the same. The new platform scans and analyses such complex trading data and tallies them with various other information, including the IP address from which the trade was made, the report added quoting a senior regulatory official.

The official also said that the new platform scans derivative trading in publicly traded companies based on ‘overall delta positions’. In other words, it tries to detect large unhedged positions taken by individuals in each stock and then scrutinizes them, the report mentioned.

Analysing and maintaining a database

The functionality of the new platform is not limited to just monitoring the trading. In addition to analysing suspicious trades, it also creates a database of such transactions along with traders who have undertaken the transaction. Officials quoted by the report said that this feature helps the regulator in establishing patterns and in case a trader frequently indulges in such transactions, they will be captured by the system and alerts will be sent out.

In its annual report released earlier this month, the market regulator said that alerts generated by the new platform are significantly more sophisticated than the existing insider trading alerts and they have given a boost to its surveillance in the complex equity derivatives market consisting of futures and options contracts.

As per official data, Sebi received 210 complaints of insider trading in FY21, out of which 30 were taken up for investigation, as compared to 185 in the previous fiscal where 49 were investigated.