Data, technology that makes stock market regulation easier, says Madhabi Puri Buch; assistance with supervision, policy making

By Trisha Shreyashi

Madhabi Puri Buch, the first female chair of the Securities & Exchange Board of India, addressed the 49th Foundation Day Lecture at the Indian Institute of Management, Bangalore as the main guest of the occasion. She spoke strongly about the role data and technology play in the regulation, surveillance, reporting, prosecution and policy making for the capital markets in India.

“Everything technology is doing today is basically redesigning processes to manage those three key aspects: risk reduction, cost reduction and ease of doing business”

Madhabi Puri Buch, SEBI President

“The first non-IAS to helm the regulatory agency shared her experience from more than two decades in the corporate sector and underlined that there are two things that have always been a barrier to future plans. One was the lack of data that hindered decision-making. Second is a huge enabler ie tech, she said.

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Data and technology in persecution

She reiterated that one of the things SEBI is very concerned about is whether there is any misconduct in the market such as front running, insider trading, etc. Previously, the regulator had to rely on black boxes and imported software that didn’t work for the Indian ecosystem. She emphasized the time and resource constraints of a government organization when later hiring or contracting experts to technically upgrade itself. That’s why SEBI’s in-house team has put together algorithms to detect suspicious trading patterns and detect misbehavior in the market.

She explained the use of data in surveillance and adjudication and shared that SEBI had included a QR code in one of its orders. The QR code has embedded the video clip showing a person’s delta trading positions in different scrips over time. The regulator noted from the clip that the individual’s delta position shot up just before the quarterly results, unlike his trading pattern at other times, which was relatively systematic. A cursory glance at the film makes it very easy to infer insider trading, Buch said. That is the power of data and especially the power of visualization, especially when you have to convince other people.

The regulator has similar front-running algorithms that allow it to detect whether the misbehavior is happening on the broker’s side or at the mutual fund’s end, Buch added. SEBI has been able to leverage its powers to spot misbehavior in the market with the help of data analytics and technology upgrades, she emphasizes. However, we’ve had our setbacks because regulation hasn’t kept up with technology, she said in her speech, hopefully anticipating catching up in a few months.

“The purpose of algos is to prevent the crooks, not just catch them”

Madhabi Puri Buch, Chairman, SEBIA

About supervision, reporting & inspection

Apart from looking at data for oversight, SEBI relies a lot on data in terms of information in the deposits for different entities to reduce the information symmetry, which is the fundamental premise of an efficient market. Sharing her experience with resistance to changing the way data is reported, Buch said eXtensible Business Reporting Language (XBRL) has revolutionized the filing system by adding the power of data. It standardizes the way of archiving and makes it easy for analysts and media to pick it up.

“By saying with the stroke of a pen that all filings will now be in XBRL, you are changing the way data is presented to the public and the way business is expected to be accountable in terms of reporting…100% audit of every single one control, each individual data point”

SEBI chairman

Buch emphasized the use of technology for inspection and auditing. Previously, it was a year-long process involving a team of auditors, sample checks, manual reviews, and issues between auditor and auditee over the interpretation of the law and by the time the report reaches the regulator’s desk, it is too late to act. against any misconduct that has occurred.

Buch explained it in the context of the mutual fund industry, where the funds were informed about the algorithms that would examine their movements. The data is collected daily and is performed every three months. The funds receive an excel sheet with several tabs related to different regulations. The Excel sheet states for each transaction registered by date whether there was a violation and, if so, what fine was prescribed for such violation.

Reiterating the efficiency of algorithms, Buch said that, as the inspections are done in mutual funds today, it could be done on a daily basis, but the regulator chooses to do it on a quarterly basis. This gives the industry time to find and fix its own mistakes, she added. However, the detection algorithm as it currently stands falls short of detecting unstructured misbehavior such as misselling schemes.

“The regulator is coming up with algorithms to detect violations of the spirit of the law, not just the letter of the law”

Madhabi Puri Buch, Chairman, SEBIA

Adoption of technology by companies

Buch underlined the need for companies to adopt the technology. One example she explained was the lien reaffirmation mechanism that requires the trader to deposit margin at the exchange. Previously, the broker would aggregate the margin of all traders and place it with the exchange. Some of these brokers were abusing client securities. Now the trader is pledging it in his account in favor of the broker who is in favor of the exchange, eliminating the pooling system. This also addressed the issue of transferring funds, in addition to alleviating misuse of the securities.

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Buch revealed that this was a huge technological change in the entire market and that it has never been done anywhere else in the world. So when it comes to protecting customer securities, there is no one better than India today, she said. This is the power of technology in risk management. Another example she highlighted is e-KYC and today companies are onboarding about 93% of their customers through e-KYC. As a result, costs have been reduced and good results have been achieved, and companies have crossed tier 4 and tier 5 cities, making financial inclusion economically viable for companies.

Towards the end of her speech, Buch spoke about the role of data analytics in analyzing the impact of policies, their implications for the target audience, and mitigating potential problems that may arise. The regulator analyzes it at a very granular level about which entity and for what reason will be affected by that policy. So policy making has a huge need for data analytics, Buch added.

(Trisha Shreyashi is an independent legal counsel and a panelist on the HBR Advisory Board)

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