SOHAIL SARFRAZ

ISLAMABAD: An appellate bench of the Securities and Exchange Commission of Pakistan (SECP) has conveyed to the brokers' community that front running is akin to insider trading and a criminal offence in the stock market.

These observations were given by a two-member SECP Appellate Bench, while deciding a case against a trading rights entitlement certificate holder (or broker) of the Pakistan Stock Exchange Limited (the PSX) and licensed as a securities broker under the Securities Act, 2015.

It is important to mention that front-running is when a broker or other entity enters into a trade because they have foreknowledge of a big non-publicized transaction that will influence the price of the asset, resulting in a likely financial gain for the broker.

Front-running is illegal and unethical because it takes advantage of private information that is not available to the public.

"Insider trading" occurs when someone makes an investment decision after receiving information from an employee (insider) of a company which is not yet available to the general public.

According to the order of the SECP Appellate Bench, the said securities broker had filed an appeal with the SECP bench against the order of the Commissioner Securities Market Division SECP (respondent).

The SECP commissioner has imposed a penalty of Rs500,000 on the securities broker for unlawful extension of financing to customers and maintenance of ineffective internal controls posed considerable risk to customers of a securities broker, integrity of the entire brokerage industry and the capital market as a whole.

The appellant (securities broker) argued before the bench that as far as front running is concerned all the referred transactions were executed on the express instructions of the clients and there was nothing on record to show that such transactions were taking place in violation of the law.

The SECP Appellate Bench has heard the parties i.e. securities broker and Commissioner Securities Market Division SECP.

The bench is of the view that front running is akin to insider trading and a criminal offence. "We have perused the investigation report dated 11/10/17 and observed that there is no evidence to suggest that front running was taking place through the securities broker. However, securities broker in violation of the Code of Conduct failed to exercise due skill and care in the conduct of its business. Furthermore, we are of the view that the securities broker has violated the Securities Rules by extending unlawful financing to clients."

The law was already in place which prohibited unlawful deposit taking, in one form or another, and Circular 20 was only issued to warn brokers who were involved in unlawful deposit taking to refrain from such activities which was in contravention of both the Companies Act and Securities Act.

"Having said that, we also agree with the securities broker that prior to 2017, most brokers were given a warning and not penalized for unlawful financing in respect of debit balances. Moreover, the securities broker has stated on record that any violations on their part were unintentional and that they are already in the process of surrendering their license," the bench observed.

"In view of the foregoing, the penalty imposed on the broker is reduced to Rs250,000 and the broker is directed to ensure full compliance of the provisions of the law," SECP Appellate Bench added.