insider trading: Sebi takes a leaf out of Vegas Casinos’ AI book to crack down on insider trading
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The Securities and Exchange Board of India (Sebi) is in talks with a top US-based AI provider to purchase such a system, said people with direct knowledge of the matter. If the deal goes through, the company will customise the software according to the requirements of Sebi.
“The company has given a live demonstration to Sebi a few weeks ago as to how the software will work and about the customisations possible on the platform,” said one of the people.
The casino AI system’s high level of accuracy in raising red alerts in the event of abnormal trades is the reason why Sebi is considering the proposal.
“The casino AIs come with superior risk management systems compared to the traditional data analytics that regulators use, because the margin of error for these AIs is very thin. Failure to detect even one rogue gambler could cost a casino in seven figures,” the person added.
An email sent to Sebi seeking comment remained unanswered till press time Monday.
Many global financial regulators, especially in the western world, are using or considering such AI programmes to nail securities law violators.
The casino AIs primarily serve two purposes: they provide an ‘intuitive casino’ and help in risk management. The intuitive casino replaces a human gambler with a software code and allows the casino customers to play against machines. This function of the AI may be of little use for regulators like Sebi. However, the second function, which is risk management wherein they automatically analyse the bets being placed, modes of payments and player profiles to extract suspicious trends and alert the casino, is of interest to them.
Sebi is investing more in technology these days to clamp down on insider trading and other securities violations as the ever-growing volumes and use of advanced software by market participants have made it tedious to rely only on human capabilities. Until recently, the regulator mostly relied on tips and information from exchanges and market intermediaries to investigate white-collar crimes, but they have been found wanting to build water-tight cases against insider-trading violations.
According to experts, casino AIs come with the ability to draw the regulators’ attention to synchronised trades which are either done based on insider tips or to front run a stock. For instance, there could be a group of 20 stock operators spread across the country who are working together to manipulate a stock. In some situations, it could also be the case that these 20 traders are not acting in concert but may be getting the same insider tip.
Front running and insider trading violations have always been difficult for Sebi to prove in the absence of direct evidence in most cases. This has prompted the regulator to build tailor-made algorithms, building correlations between entities and individuals. The regulator’s systems process about 20 million trades daily along with the associated details to check the probability of an investor indulging in insider trading.
“We have seen a drastic increase in the number of insider trading investigations taken up by Sebi in the last one year after it ramped up surveillance systems using technology,” said Tomu Francis, partner, Khaitan & Co. “We are receiving a lot of queries from our clients regarding such investigations and there is no doubt that the scrutiny of trades has gone up ever since the adoption of technology.”
‘High-risk’ traders could come under Sebi’s scrutiny if the casino AI platform is implemented. In the case of casinos, high-risk clients are the ones who are over leveraged, or have a trend of placing erratic bets. For Sebi, these platforms could red-flag entities or individuals who frequently take wild bets in the market and keep a special tab on such entities.
“There is nothing illegal if a trader places such wild bets, however if the bets almost every time work in the favour of the trader, it could mean the trader was acting based on an insider tip,” said the founder of a leading algo provider in the securities market. “Most of the traditional data analytic software are good at spotting connections through background information regulators have including the social media imprint of such individuals, but Casino AIs have the capability to spot trends even when there is little background data,” he added. These AIs also come with anti-money laundering features and hence are very popular among tax regulators globally, the person added.
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