How a family of front-runners was busted because of one slip-up

All of them have been banned from the securities market for one year.

A family of front-runners, who operated using an unusual method and carried out their activities across two organisations, met their undoing due to a single slip-up.

The market regulator found that many of the family's orders originated from a location accessible only to one member—the insider. This indicated that the insider was placing the orders.

Nikhil Khaitan, a dealer at Sumedha Fiscal Services (Sumedha) and Eureka Stock and Share Broking Services Ltd (Eureka), and his family members including his parents, wife and sister were asked to disgorge Rs 1.52 crore earned through front-running and pay a total of Rs 15 lakh in penalty. The Securities and Exchange Board of India (SEBI) passed the order on March 28 after investigating the period between September 1, 2016 and August 2, 2022.

The market regulator's surveillance system had generated alerts because of unusual activity in various scrips between October 2021 and November 2021, and involving the accounts of Om Prakash Khaitan and Manju Khaitan (the parents of Nikhil), Neha Khaitan (wife) and Nidhi Tibrewal (sister). On investigation, it was found that Nikhil, as a dealer of big clients and having knowledge of their trades, front ran the big clients' trades using the accounts of his family members.

While there were trades matching with the big clients (which indicated front-running) and chats between the entities that showed that family members had given Nikhil access to their trading accounts, the clinching evidence appeared to be the location from where the family's trades were made.

Nikhil's employer Eureka allowed dealers to have access to their personal devices at their desks and many of the family's orders were coming via a web portal with an IP address belonging to Eureka. As SEBI's officials found out, none of the other family members had visited the Eureka office when these trades were made. That is, the trades were placed by Nikhil, who had access to big clients' orders.

Challenges faced

It was not an easy racket to crack open. The front-running operation spanned years and big clients of two different broking houses.

The family was suspected of front running trades of Ares Diversified, Assam Roofing Ltd and Jhalar Vincom Pvt Ltd, who were trading through the broker Eureka. During this time, in 2022, Nikhil was a dealer with Eureka.

SEBI's investigation later revealed that the same family's trades matched with the trades of big clients of another broking house, Sumedha, when Nikhil was a dealer there between September 26, 2008, and March 30, 2019.

Therefore, the regulator decided to investigate the trades taken by this family between September 2016 and August 2022, to cover the duration of Nikhil's employment with both brokerages.

Besides the challenge of gathering information across various entities, another hurdle was that trading by the suspected front-runners did not follow the usual buy-buy-sell (BBS) or sell-sell-buy (SSB) pattern.

In BBS, the front-runner buys (B) before the big client buys (B) and sells (S) when the price of the scrip goes up. In SSB, the front-runner sells (S) before the big client sells (S) and then buys (B) back the securities at a lower price to meet the obligation created with his first sell order.

But in this family's suspected front-running operations, the second leg of their trades was not placed after the big client's orders. They had used market limit orders, which instruct the exchange to buy (or sell) if the price crosses an upper limit (or drops below a lower limit). For example, a person can ask the exchange to sell a stock if it crosses Rs 100, then buy a stock at Rs 80 knowing that a big client would come in and buy and take the price above Rs 100. Then, they don't have to place a sell order after the big client's buy order, that sell order would get automatically triggered. This method may not reflect a BBS pattern.

But, as the SEBI's order pointed out, the first leg of the order placed by the front-runner, prior to the order of the big client, qualifies as front-running. It added that the second leg of the order—where the front-runner cashes in on the unfair advantage — does not qualify as front-running.

Therefore, even if the orders do not follow the BBS or SSB pattern, as in this family's case, they can qualify as front-running.

In the order, SEBI's Quasi Judicial Authority, G Ramar also found them to have distorted the price of scrips. He noted, "Noticees (the Khaitan family) in the process of front running trades of the Big Client have not only interfered with the market forces of supply and demand of a particular scrip but have also artificially influenced the price and volume of the scrip and have thus, prima facie distorted them."

All of them have been banned from the securities market for one year.