The Securities and Exchange Board of India (SEBI) is conducting an investigation into Choice Broking over alleged front-running activities by its employees, according to Money Control. The market regulator reportedly carried out search-and-seizure operations at the brokerage’s Mumbai office between January 6 and 10 to examine suspicious trading patterns.
Front-running is an illegal trading practice where a broker or trader, having access to non-public information about a large impending order from an institutional client, executes trades in advance to profit from the subsequent price movement. This unethical practice can result in significant losses for institutional investors while providing unfair advantages to those engaged in front-running.
Despite reports of SEBI’s probe, Choice Broking has categorically denied to Money Control for any search-and-seizure operations. In a statement issued to Moneycontrol, the brokerage stated, “There has been no search and seizure operation undertaken by SEBI at Choice Equity Broking Ltd.” It further emphasized that as a regulated entity, it maintains routine interactions with SEBI to ensure compliance with all regulatory requirements.
According to Money Control, SEBI’s surveillance team focused on tracking trading irregularities that suggested front-running of multiple large clients’ trades. The investigation reportedly uncovered a system where employees allegedly placed their own trades ahead of client orders to exploit anticipated price movements.
“In fact, there seems to have been a parallel trading system set up for this,” said a person related to matter to Money Control. The suspected system allegedly allowed traders to execute orders before dealers processed large client trades, thus maximizing potential gains for those engaged in the scheme.
How Front-Running Works
SEBI’s investigation reportedly identified patterns consistent with buy-buy-sell (BBS) trades, a common front-running strategy. In this pattern:
- The broker purchases shares before a large client order is executed.
- Once the client’s buy order is processed, the share price rises.
- The broker then sells the earlier-bought shares at a profit.
Alternatively, in a sell-sell-buy (SSB) pattern, the sequence is reversed:
- The broker sells shares before a large client’s sell order.
- The client’s order pushes the price lower.
- The broker then buys back shares at a lower price, profiting from the price drop.
