Stock market manipulations: SECP probing cases with help of 'Awacs' software

[Naveed Yaseen]

MUSHTAQ GHUMMAN
ISLAMABAD (May 21 2009): The Securities and Exchange Commission of Pakistan (SECP) is reportedly investigating several cases of short-selling, price manipulation, and insider trading, with the help of 'Awacs' software, whose Indian-based consultants were denied visa by Interior Ministry, official sources told Business Recorder here on Wednesday.

Sources said that Phase Two deliverables of the 3iLnfotech software include alerts and reports which either have been newly designed or require major customisation as per SECP requirements. This encompasses new alerts for futures and ready market, Unique Identification Number (UIN) level graphical analysis, reports on UIN basis consisting of critical reports for risk management, short sales and insider trading detection.

SECP is now moving forward with implementation of Phase 2 deliverables with the existing arrangement, whereby the local vendor will partner with 3iLnfotech for phase two deliverables as well as for support services. In this regard, SECP has also approached 3iLnfotech to finalise the scope of work and time-line for implementation of phase 2.

With respect to development of phase 2 deliverables, the estimated cost amounts to $148,000 as per the commercial proposal submitted by 3iLnfotech. A variation of 20 percent of the budgeted amount is expected as estimation differences, sources said. The estimated timeframe from initiation of development till the initiation of live operations for phase 2 is six (6) months.

Giving details, sources said that after the implementation of Awacs Phase 1 deliverables at SECP, the surveillance system aided in detection of numerous instances of wash sale and short selling, where the enforcement actions have been taken after conducting the investigation. Real-time monitoring of trading activities for all exchanges is conducted on daily basis.

Investigations into many other instances of short-selling, price manipulation and insider trading are underway, which otherwise would have been arduous without the surveillance software. Considered as international best practice, frontline regulators are primarily responsible for establishing and enhancing the surveillance capability.

The lack of capacity of frontline regulator to undertake an effective surveillance function impelled the SECP to establish its own surveillance function. In order to enhance the surveillance capacity of the SECP, it was decided to procure surveillance software. For this purpose, proposals were invited from international vendors with representation in Pakistan. In response to the advertisement, following three companies submitted proposals:-

Systems ('Smarts'), Australia, partnered with EDP Services, Pakistan Millennium IT, Sri Lanka partnered with Techlogix, Pakistan 3iLnfotech (Pvt) Limited ('3iLnfotech'), Middle East and Africa (subsidiary of ICICI Group, India and based in Hyderabad India) partnered with Systems Innovations Private Limited ('Si3), Pakistan.

A special procurement committee was formed in March 2006 for evaluation of these proposals and recommending the surveillance solution for procurement. All proposals received were evaluated on functional, technical and financial grounds. On technical grounds, Smarts was considered the best among all surveillance solutions.

However, the cost for procurement of Smarts mounting to $2.01 million was very high and time-line for implementation of basic module extended over a period of 2 years. Conversely, 'Awacs' offered features which closely related to Pakistani market and the cost was significantly lower compared to other surveillance solutions.

On the recommendations of the special procurement committee, it was decided by the SECP on January 16, 2007 to procure 'Awacs' software by 3iLnfotech partnered with Si3. Total cost for procurement of 'Awacs' amounted to $347,500 whereby application cost equalled $210,000, travelling and administrative charges summed to $17,500 and $120,000 were allocated for service and maintenance cost for a period of 5 years. Subsequently, a contract was signed with Si3 on March 2, 2007.

'Awacs' software facilitates multi-exchange, multi-segment monitoring of market activities by generating alerts on real time basis for any abnormal movement in price and volume instigated by the trading activity. The software receives the data feed from all three stock exchanges and for all market segments till the client/ 'UIN' level. Hence, it facilitates the analysis on UIN basis across the exchanges.

The software also facilitates the detection of market manipulation, price distortion and other market abusive activities which go against the very fundamentals of a fair market. The data mining feature enables the generation of a meaningful analysis with the help of historical information.

As per the implementation plan, the 3iLnfotech's software consultants were to travel to Pakistan from India to implement the system. However, due to visa refusal by Ministry of Interior for 3iLnfotech team, it was decided to undertake the implementation activities through Dubai, UAE.

The Policy Board was apprised of the situation in its meeting held on July, 14, 2007 and in light of the consent of the Policy Board, the contract for procurement of surveillance software 'Awacs' was amended to accord for conducting requirement analysis, user and technical training in Dubai, UAE.

Sources said that during the course of implementation and requirement analysis for 'Awacs', it was realised that some standard features will have to be further amended to meet SECP's requirements whereas some requirements especially those pertaining to market abuse detection, risk management and CFS market will attract new development and major customisation efforts.

Considering the substantial time and effort required for undertaking the major customisation and new development and the pressing need for a surveillance solution at SECP, it was decided to divide the deliverables in two phases (phase 1 and phase 2).

Phase one deliverables comprise of features inherent in 'Awacs' software (phase 1) and was installed in March 2008 at the SECP. A detailed User Acceptance Testing ('UAT') was installed in March 2008 identifying the gaps and bugs for the software deliverables. Subsequently, 2 more UAT sessions were conducted in for re-verification of the rectified issues.

The Live operations for 'Awacs' (Phase 1) were set off with a soft-launch on April 4, 2008 and after the test-run period, a formal go-ahead for live operations was made on September 2, 2008. 'Awacs'with its phase 1 deliverables is live and operational at SECP with the following features:

Generation of alerts on real time for any abnormal movement in price and volume generation of analytical reports on real time and end-of-day basis till end user level including reports for wash sales and circular trade. Sources said that phase two deliverables include alerts and reports which either have been newly designed or require major customisation as per SECP requirements.

This encompasses new alerts for futures and ready market, UIN level graphical analysis, reports on UIN basis consisting of critical reports for risk management, short sales and insider trading detection. As per the signed contract, any new development would be charged separately at a rate of $240 per person/ per day.

Nevertheless, in case of any travel restrictions, the teams from SECP, 3iLnfotech and its local partner may conduct requirement/ technical analysis sessions in UAE. SECP is now moving forward with implementation of phase 2 deliverables with the existing arrangement, whereby the local vendor will partner with 3iLnfotech for phase 2 deliverables as well as for support services.

In this regard, SECP has also approached 3iLnfotech to finalise the scope of work and time-line for implementation of phase 2. With respect to development of phase 2 deliverables, the estimated cost amounts to $148,000 as per the commercial proposal submitted by 3iLnfotech. A variation of 20 percent of the budgeted amount is expected as estimation differences.

After the implementation of 'Awacs' Phase one deliverables at SECP, the surveillance system aided in detection of numerous instances of wash sale and short selling, where the enforcement actions have been taken after conducting the investigation. Real-time monitoring of trading activities for all exchanges is conducted on daily basis, sources added.

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