SEBI scans dealing room networking chats to curb insider trading

Dealing room activities of brokers, fund managers and other institutional investors have come under regulatory scanner for possible manipulations through use of web-based social networking apps and messaging platforms.

While use of personal mobile phones are already prohibited inside dealing rooms – where trades are executed on behalf of clients – some brokers and fund managers have been found to be active on social networking and other web-based groups and messaging platforms while placing orders, sources said.

This has brought to fore significant risks of insider trading, front running and other manipulative activities with regard to key client trade information being shared with outside investors or even among the dealers possibly working as a cartel, they added.

Brokers and fund managers are not allowed to use their personal mobile phones inside dealing rooms to receive orders from clients, while fund houses and brokerage firms are required to store records for all client calls for future inspections by SEBI.

According to sources, SEBI is considering further tightening its norms with regard to dealing room communications, given the fast emergence of social networking and other web-based messaging platforms.

Those likely to be affected include entities dealing in stocks, derivatives and currency trading, among others.

Restricted use of BBM, WhatsApp

In a global probe into suspected rigging of forex rates, including those involving rupee as well, foreign regulators already suspect use of intra-bank and web-based messaging platforms among the currency traders.

Subsequently, many large global banks have already started clamping down on use of such platforms inside their dealing rooms and similar action can be expected with regard to Indian markets as well, sources added.

The market watchdog is already mulling over steps it can take to check risks being posed by use of new-age smartphone messaging services like BlackBerry Messenger (BBM) and WhatsApp by manipulators to spread sensitive information about their target stocks.

To strengthen its surveillance on stock market transactions, SEBI has already got software tools in place along with IT experts to analyse discussions on social networking sites like Twitter and Facebook.

However, applications like WhatsApp and BBM have proven more tricky, given the multi-level difficulties faced in tracking the source and spread of market-sensitive information through these mass-messaging platforms.

While these applications use the Internet servers of smartphones, the transmission of messages through these platforms happen in a highly encoded manner and it is very difficult for a third party to decode them.

Market manipulators started using blogs and social media platforms like Facebook and Twitter in a big way a couple of years ago whenever they wanted to spread a word for influencing some stocks.

However, most of the information shared on blogs and social media platforms can be easily tracked, given the highly public nature of such platforms.

After finding out that the source and spread of any sensitive information through social media platforms could be apprehended easily by the regulators, the manipulators began using BBM and WhatsApp.

The free messaging services available on these platforms seem to have added to their attractiveness among the manipulators.

However, SEBI’s new powers to seek details like Call Data Records and other information from telecom and internet companies may now help it get information on messages shared through mobile apps – a commonly used term for such applications.

Insider trading through mobile apps, internet

SEBI’s investigations into a number of insider trading and market manipulation cases during the recent months have shown that apps like BBM and WhatsApp were used.

Last year, SEBI had hired specialist IT officers for keeping an eye on the discussions taking place at these platforms.

Experts say that social media platforms have become a very effective place to spread the information fast, but at the same time, they are also being used by various scrupulous elements, including those in the stock market.

There are numerous blogs as well where members discuss stock market trends and in many cases stock tips are also exchanged.

Facebook and Twitter are also full of such discussions and it is feared that scrupulous elements could be using such forums for their market manipulation activities.

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