Officials of the Securities and Exchange Board of India (Sebi) and stock exchanges have been conducting inspections at various broking firms-both large and small-in the past few months with a focus on institutional and high net worth investor dealing desks, said the people cited above.
Email queries sent to the Sebi, NSE and BSE spokespeople went unanswered.
They are examining whether each order can be traced to the originating client instruction, access to controls within dealing-room systems, the mapping of colocation user IDs to trades, and the software being used on dealing desks.
In these reviews, Sebi and exchange officials have sought details on whether orders from clients such as institutions and large investors are being transmitted only by designated and authorised individuals, and the channels through which such instructions are being received.
The regulator has asked brokers for a complete trail for every trade, including the originating instruction, whether through recorded dealer lines, or emails or approved messaging platforms such as those on the Bloomberg and Reuters terminals.
Officials are examining whether the person placing or relaying the order was permitted to do so through that channel and whether the communication trail aligns with the executed trade. The aim is to create a complete audit trail for every trade, making it easier to detect and deter front running after a series of enforcement actions by Sebi.
Last year, the regulator alleged that stock market operator Ketan Parekh and his associates front-ran trades of a large unnamed US-based fund, using advance knowledge of pending orders routed through a consultant and executing positions through a network of brokers ahead of the client’s trades.
Sebi has sought historical trade data going back as far as three to five years, including derivatives transactions, with a specific focus on the timestamp of communications linked to the orders. Sources said the regulator’s bigger focus has been the information leaks in HNI trades before their execution. In various brokerages, some large HNI and family-office transactions are also executed through institutional dealing desks when order sizes and strategies resemble those of institutional investors, said one of the people cited above.
“There is a lot of concern over front running in HNIs-related trades, which is actually more difficult to plug,” said a senior compliance official at a broking firm. Various restrictions on brokerages’ dealing room access and practices are already in place. Regulations require dealers to use recorded lines and approved electronic channels for order instructions, with strict controls on mobile usage to prevent information leakage.
During the trading hours, dealers and traders are typically required to switch off their personal phones and store them outside the dealing rooms. Many of these employees are often queried by compliance officials on various phone calls and emails that even slightly deviate from normal dealing-room communication patterns.
But some recent instances of employees using other methods to leak information from inside the dealing room have caught the attention of the authorities, prompting them to examine the digital footprint of trading desks. In one such case, an employee inside the dealing room had made a dummy online website and sensitive information was being passed on, said one of the people cited above.
In yet another instance, employees were disclosing upcoming trades through codes on the chat section of video-sharing platforms. Colocation access and usage is another area under review, said one of the people in the know.
Brokers have been asked to disclose who has access to colocation IDs and who is using them to place trades. The exercise is examining whether authorised IDs are being used strictly by the intended individuals or shared across users, the person said.