The art of catching sophisticated insiders

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Market regulator Securities and Exchange Board of India (Sebi) has been addressing the surveillance mechanism on trading violations like insider trading in several ways. This time, it has come up with some more sophisticated steps. It has set up a system through which it will scan and capture the positions of those traders who often hold large “Delta” positions. Simply put, they will gather information on those traders who hold large “unhedged” options positions. It is quite obvious that an individual will not take a large option position without any hedge, it will be done by only those people who are privy to some information that is not available to the public at large.

Apart from gathering information on such large unhedged trades, the Sebi will also create a database of such entities or individuals to study the frequency of such acts. This should be taken as one of the measures which can control insider trading in the equity market. However, we believe that it is impossible to completely curb these types of trading. Even the US, where regulators are very strict, is not able to control insider trades completely. In the recent past, three former employees of Netflix were charged with insider trading in the United States.

One should first understand that insider trading is an illegal practice of trading on the stock exchange to get the advantage through having access to confidential information. Earlier, insiders used to buy and sell shares based on insider tips. With the objective of making a quick buck, insiders have just changed their strategy to evade the law. It is very difficult to track insider activity as compared with the transfer of securities from one account to other. Sebi received more than 200 complaints of insider trading in FY21 against 185 in FY20, according to reports.