The phone in the dealing room rang just as Rohan Chawla had finished briefing his colleague. It was about a buy order from an overseas client for 10 lakh shares of Steel Authority of India (SAIL) to be executed at a particular price. Mr Chawla (name changed), who heads the equity sales team at one of the reputed institutional stock broking firms, was impassive as he took the call. Nobody could have guessed that he had been expecting the call. There were 10 minutes still left for the day’s trading session to begin.
The conversation that followed may sound as a harmless exchange of market views between two participants. But what actually takes place is a typical ‘front running’ operation. Technically, front running is an act in which a trader takes up a position of unfair advantage ahead of a large buy or sell order by a client.
This is something as old as the stock market itself. After the usual exchange of pleasantries, the voice at the other end asked “How do you think the European market will play out today, Rohan?” “It looks very good to me,” Mr Chawla replied, and before ending the conversation added, “I am in a bit of a rush, we shall speak at 10 ‘O’ clock tonight.”
On the other side, JC, as the market operator was known to friends, gave instructions to his dealers after disconnecting the call. “Buy 1 lakh shares of SAIL as soon as the market opens and sell it if it rises by over Rs 5 later in the day, and buy another 10,000 shares in account L264.”
Innocuous codes
Through a coded language, Mr Chawla informed JC that he had a buy order for 10 lakh shares of SAIL to be executed later during the day(Europe was the code for SAIL while 10 ‘O’ clock was the code for the quantum of the buy order. Under the arrangement, JC would take positions in the stock before the order was executed, and also buy some shares in the account of Mr Chawla, who had passed on the information. When the price of SAIL would rise as a result of the client’s buy order, JC would square off his position for a neat profit, and share a part of it with Mr Chawla.
If it had been a sell order, JC would have short-sold SAIL shares and then covered it up later. Dealing room phones in all leading institutional broking firms are recorded. But even if a Sebi investigating officer were to play back the recorded conversation between JC and Rohan Chawla for suspected front running, he would have little evidence to prove that the two were in collusion. Also, the players who indulge in these activities had different sets of codes and these keep changing all the while so as to not arouse any suspicion.
The quantum of the order could correspond to the days of the week (Sunday=1, Monday=2 and so on) or time of the day or days of the month, while in many cases a parallel set of stock codes have been devised. On that list, Arvinds Mills may be the code for ACC, and similarly for other stocks. So if a dealer or sales official at a broking house tells somebody on the phone that Arvind Mills looks very good, he is actually leaking out information that he has a buy order for ACC. If he has a sell order for ACC, he may say that Arvind Mills looks weak.
The real players
Market players are divided on whether front running is as rampant as it used to be in the mid-90s till about 2004. “Earlier the market was very shallow and there were limited opportunities for making money; so front running was common,” says a veteran BSE broker.
“But today the market has become too huge and there are ample opportunities. Most players have grown rich beyond their wildest imaginations, so they would not want to risk their careers by doing something silly,” he added. With the depth of the market having increased tremendously over the past few years, it is difficult for players like JC and Chawla to win consistently.
JC may know about the 10 lakh-share buy order in SAIL at Chawla’s firm. But if some other broking house has a sell order for 20 lakh shares of SAIL and JC is unaware of that, he may end up losing money by front running the buy order. But smart operators like JC usually have friends at more than one institutional broking house.
But many players disagree with the view that instances of front running have reduced. They argue that the stakes have only gotten bigger. And these days, it is not as much about cash market transactions as it is about orders on Nifty futures, the new playing ground for institutional investors.
And equity sales staff and dealers executing the orders are only the small fish in the oldest game in equity markets. The sharks are some of the ‘rotten apples’ in the fund-manager community. The dealers may execute the trades in all honesty. But what if the fund manager — the client who has placed the order — has already tipped off an operator about the order. There are enough such instances, claim dealers at broking houses.
Keeping tabs
Last week, the regulator barred a dealer at UTI Securities, a sub-broker at Emkay Share and Stock Brokers, and a director of Prayas Securities from dealing in shares of Ballarpur Industries till further notice for alleged front running. This is the first time that the regulator has passed an order in a matter relating to front running.
Sebi’s contention is that the dealer at UTI Securities passed on the information about a huge sell order in Bilt by an overseas client to the other two, who along with their retail clients, then short-sold Bilt shares.
The regulator has arrived at the conclusion by observing the trading pattern in Bilt shares. But proving charges of front running may turn out to be as difficult as proving an insider trading violation. What can make the regulator’s task easier is the power to seize e-mail and phone conversations of the accused. And if those involved have managed to come up with clever codes, it may make matters even more difficult for Sebi. Whether it manages to get a conviction in the abovementioned case or not, the regulator’s aim may also have been to warn intermediaries resorting to unethical practices.
The conversation that followed may sound as a harmless exchange of market views between two participants. But what actually takes place is a typical ‘front running’ operation. Technically, front running is an act in which a trader takes up a position of unfair advantage ahead of a large buy or sell order by a client.
This is something as old as the stock market itself. After the usual exchange of pleasantries, the voice at the other end asked “How do you think the European market will play out today, Rohan?” “It looks very good to me,” Mr Chawla replied, and before ending the conversation added, “I am in a bit of a rush, we shall speak at 10 ‘O’ clock tonight.”
On the other side, JC, as the market operator was known to friends, gave instructions to his dealers after disconnecting the call. “Buy 1 lakh shares of SAIL as soon as the market opens and sell it if it rises by over Rs 5 later in the day, and buy another 10,000 shares in account L264.”
Innocuous codes
Through a coded language, Mr Chawla informed JC that he had a buy order for 10 lakh shares of SAIL to be executed later during the day(Europe was the code for SAIL while 10 ‘O’ clock was the code for the quantum of the buy order. Under the arrangement, JC would take positions in the stock before the order was executed, and also buy some shares in the account of Mr Chawla, who had passed on the information. When the price of SAIL would rise as a result of the client’s buy order, JC would square off his position for a neat profit, and share a part of it with Mr Chawla.
If it had been a sell order, JC would have short-sold SAIL shares and then covered it up later. Dealing room phones in all leading institutional broking firms are recorded. But even if a Sebi investigating officer were to play back the recorded conversation between JC and Rohan Chawla for suspected front running, he would have little evidence to prove that the two were in collusion. Also, the players who indulge in these activities had different sets of codes and these keep changing all the while so as to not arouse any suspicion.
The quantum of the order could correspond to the days of the week (Sunday=1, Monday=2 and so on) or time of the day or days of the month, while in many cases a parallel set of stock codes have been devised. On that list, Arvinds Mills may be the code for ACC, and similarly for other stocks. So if a dealer or sales official at a broking house tells somebody on the phone that Arvind Mills looks very good, he is actually leaking out information that he has a buy order for ACC. If he has a sell order for ACC, he may say that Arvind Mills looks weak.
The real players
Market players are divided on whether front running is as rampant as it used to be in the mid-90s till about 2004. “Earlier the market was very shallow and there were limited opportunities for making money; so front running was common,” says a veteran BSE broker.
“But today the market has become too huge and there are ample opportunities. Most players have grown rich beyond their wildest imaginations, so they would not want to risk their careers by doing something silly,” he added. With the depth of the market having increased tremendously over the past few years, it is difficult for players like JC and Chawla to win consistently.
JC may know about the 10 lakh-share buy order in SAIL at Chawla’s firm. But if some other broking house has a sell order for 20 lakh shares of SAIL and JC is unaware of that, he may end up losing money by front running the buy order. But smart operators like JC usually have friends at more than one institutional broking house.
But many players disagree with the view that instances of front running have reduced. They argue that the stakes have only gotten bigger. And these days, it is not as much about cash market transactions as it is about orders on Nifty futures, the new playing ground for institutional investors.
And equity sales staff and dealers executing the orders are only the small fish in the oldest game in equity markets. The sharks are some of the ‘rotten apples’ in the fund-manager community. The dealers may execute the trades in all honesty. But what if the fund manager — the client who has placed the order — has already tipped off an operator about the order. There are enough such instances, claim dealers at broking houses.
Keeping tabs
Last week, the regulator barred a dealer at UTI Securities, a sub-broker at Emkay Share and Stock Brokers, and a director of Prayas Securities from dealing in shares of Ballarpur Industries till further notice for alleged front running. This is the first time that the regulator has passed an order in a matter relating to front running.
Sebi’s contention is that the dealer at UTI Securities passed on the information about a huge sell order in Bilt by an overseas client to the other two, who along with their retail clients, then short-sold Bilt shares.
The regulator has arrived at the conclusion by observing the trading pattern in Bilt shares. But proving charges of front running may turn out to be as difficult as proving an insider trading violation. What can make the regulator’s task easier is the power to seize e-mail and phone conversations of the accused. And if those involved have managed to come up with clever codes, it may make matters even more difficult for Sebi. Whether it manages to get a conviction in the abovementioned case or not, the regulator’s aim may also have been to warn intermediaries resorting to unethical practices.
