Insider trading and short-selling abuse ponzi schemes. These are just some of the many types of stock market trading frauds that have been carried out in recent times.
With?fraudsters becoming more and more tech-savvy, SEBI is now playing catch-up. India's stock market regulator, SEBI?(Securities and Exchange Board of India), is seeking to regulate unexplained, suspicious?trading?activity through a new set of regulations as the "use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements," allow people and entities to do fraudulent activities while masking their identities and connections.
SEBI?put out a consultation paper yesterday (May 18), inviting public comments on the draft of its Prohibition of Unexplained Suspicious Trading Activities in the Securities Market Regulations, 2023.
The consultation paper outlines a framework where the regulator can start an investigation if it detects suspicious activity and can penalise if no effective counter is presented.
Under it, unusual trading patterns (UTP), when combined with the existence of material non-public information (MNPI), point to suspicious trading activity (STA). Further, when this suspicious trading activity (STA) is combined with the absence of an effective rebuttal or explanation, it can be seen as an unexplained suspicious trading activity (USTA).
Once USTA is established, the persons or entities responsible will face action as "deemed appropriate" by SEBI.
SEBI reportedly stated that it has always relied on the principle of ¡°preponderance of probability¡±, which means a high probability of violation, to act against people who are flouting the law.
But?modern technology seems to be making this a difficult proposition. Despite its surveillance systems repeatedly detecting insider trading?and front-running activity, the consultation paper stated, "The use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements, makes it impossible to establish the preponderance of probability".??
The market regulator stated that one of these surveillance mechanisms generated 5,000 alerts for 3,588 entities in 2022. Of these 3,000-plus entities, 97 showed up on their radar repeatedly, even five or more times. But action could not be taken against them because connections or communications could not be established.
Even for cases that were taken for detailed investigation, the existing regulatory framework seemed poorly equipped. Around 60% of these cases could not proceed due to a lack of "adequate evidence," and in the remaining 40%, establishing communication of unpublished price-sensitive information (UPSI) was difficult.
Hence, it has proposed a new framework.
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Under the new framework, an unusual trading pattern (UTP) shall include the repetitive pattern of trading activity by a person or a group of connected persons?that involves either a substantial change in risk-taking in one or more securities over short periods of time or activity that consequently delivered abnormal profits or averted abnormal losses.
Material Non-Public Information (MNPI) shall include information about a company or security that was generally not available and, upon becoming generally available, had a reasonable impact on the share price; information about any impending order in a security that, when executed, reasonably impacted the price of that security; or information about an impending recommendation, advice by name, etc., in a security by an influencer to the public, followers, subscribers, etc., and which, when made generally available to the public, subscribers, etc., reasonably impacted the price of that security, as per Moneycontrol report.??
A suspicious trading activity would be determined if UTP and MNPI came together. Once this is established, proceedings against a person or entity would begin.?If the accused is not able to provide an effective rebuttal, as defined by the regulations, then the trading activity would be deemed unexplained suspicious trading activity (USTA).
Here's the link to the consultation paper released by SEBI in this regard.
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