Taking advantage of insider knowledge for profit will be serious offence.
With just four words, “My watch is off”, an ex-HSBC currency trader passed a secretive signal via phone calls and chat messages to at least 10 other fellow money traders to front-run on a Sh350 billion client order back in 2011.
Fast forward to 2018, the same gentleman is now sitting in prison serving a two-year sentence starting in April. Almost at the same time of his sentencing, our local market cop was busy drafting regulations targeting similar rogue actors.
Tucked inside the Capital Markets (Amendments) Bill, 2018, front-running - practice in which a trader places orders on a security directly or through other persons’ account to take advantage of advance knowledge of orders coming from its customers – is now a serious offence. For the few bad operators involved, they now face two options; either live on the regulatory edge or drop this bad behaviour.
To the uninitiated, front-running is not an uncommon practice. It features in the industry in many different forms; a brokers’ second-cousin front-running by buying a stock that the broker came across in the course of his/her duties.
The office tea lady front-running by buying a stock after receiving a tip from her investment banking boss working on a deal involving the same company.
Or an analyst front running in his/her account, although that would be a tad stupid when there are perfectly “good” uncles around to do the trades less obviously.
But for all its different shades and colours, it’s still the same script, different cast. Unfortunately, this long-standing practice has led some to characterise the markets as unfair. Others have had even “better” words to say such as “the markets are rigged against ordinary investors” – recall Michael Lewis’ Book: Flash Boys.
This is why I am excited by this law.
But that said, challenges abound. To begin with, the complexity of markets can make this bad behaviour go unnoticed sometimes for extended periods.
In addition, combing through massive data covering contract notes, broker logs entries and any relevant private chat messages is no easy task. Even the best-in-class surveillance systems have proven not 100 percent fail-safe as witnessed in more developed market centres.
Be that as it may, this move by the Capital Markets Authority is worthy of applause. And last week’s halting of trades (suspected front running) was a good start, a good show of muscle and it sent the right signals; if you’re a dirty player, you’re not welcome here. Further investments in the area of compliance analytics and up skilling market surveillance teams may be necessary to winning this war.
Let me close this way—“a culture of cheating” should be viewed negatively and attract punishment at all times. So for all market players, doing what is right and just should be our excellent option.
Remember front-running is not a victim-less offence. Our call is to therefore help the regulator create an orderly market where buyers and sellers are willing to participate because they feel confident in the fairness and accuracy of transactions.
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Note: The results are not exact but very close to the actual.
