Regulator may lag but will eventually detect market misconduct: SEBI chief Madhabi Puri Buch

SEBI Chief Madhabi Puri Buch

The regulator will always stay one step behind to detect market misconduct, but hopefully, not too many steps behind, said SEBI chairperson Madhabi Puri Buch while addressing an event on data and technology in the capital market at IIM Bangalore on October 28.

“The regulator is constantly trying to make it harder and harder for people to do wrong things,” the SEBI chief added.

During the question and answer round, the SEBI chief spoke about the evolving ways of insider trading in the age of technology and the regulator’s way of pacing up with the issue.

“People’s modus operandi is getting smarter and smarter,” she said.

The SEBI chairperson explained how people moved from their own name to using their parents’ name, to using their ‘behnois’ to do insider trading as SEBI kept cracking common surnames and call records to get hold of the individuals at fault.

“The trend of using ‘behnois’ for internal trading became popular,” chuckled SEBI chief as the audience, too, laughed.

“There was no way you could connect your sister's husband. But SEBI started tracking call data records on suspicious cases. You see, when SEBI has to pass an order, we have to justify our conclusions,” she clarified.

Multiple call records were considered as leads to decipher insider trading and other misconducts. But then, people moved to Whatsapp - which was a problem. Eventually, they started leveraging the ‘vanishing’ feature of WhatsApp - this was a bigger problem. Thus, SEBI always had to catch up with the ways individuals rediscovered insider trading.

However, acknowledging the power of data analysis and algorithms, Buch said that the way data analysis and algorithms have powered SEBI to identify misconduct in the market is amazing.

She said that SEBI’s dependence on contemporary software systems and black boxes didn’t work eventually. Therefore, four years ago, it decided to build software internally.

“We decided to do it (build software) inhouse and assembled a team of young officers who put together the most amazing algorithms that I have ever seen across 25 years of my career. Today, when we look at the data and algorithms, it’s magic. By just observing the data, we are able to detect misconducts done by individuals in the market (sic),” she added.

Need to draw a line

“We need to draw a line with respect to the ‘finfluencer’ content available free on social media; that’s why we have Investor Advisory Regulations and Research Analyst Regulation in place.” the SEBI chief noted while addressing the ‘social’ contract individuals have when conversing about the market.

SEBI chief highlighted that the regulator has brought into effect a regulation that disallows algorithm used for promotion by displaying past performances or track record. She also explained that mutual funds' past records can be displayed as they are proved and audited; but since algorithm cannot be proven to SEBI or exchanges, the industry cannot show any kind of algorithmic performance to influence anything in the market.

“We are open to new mechanisms and would support the industry, if they come up with a system, but till then…we cannot let it happen,” Buch clarified.