Sebi considers penalties to prevent self-trades

Con­cerned that ‘self-trades’ are dis­turb­ing mar­ket equi­lib­ri­um, the Secu­ri­ties and Exchange Board of India (Sebi) is plan­ning penal action against mar­ket par­tic­i­pants doing this.

Sources say the mar­ket reg­u­la­tor has seen an increase in such trades, with the aim of cre­at­ing arti­fi­cial vol­umes and to manip­u­late prices. Trades where the buy­er and sell­er are the same and not result­ing in a change of own­er­ship are termed self-trades. Typ­i­cal­ly, these occur when mul­ti­ple deal­ers from the same broking house car­ry out trades using the same client code.

“The issue was dis­cussed at a recent meet­ing of Sebi’s sec­ondary mar­ket advi­so­ry com­mit­tee (SMAC). Based on the rec­om­men­da­tions, Sebi plans to penalise bro­kers and traders found to be exe­cut­ing self-trades,” said a per­son close to the development. 

REGULATOR IN ACTION

·         Sebi mulls penal­is­ing self-trades; based on rec­om­men­da­tion of an expert panel ·         Its inves­ti­ga­tion depart­ment raised alert over such trades terming them as ‘manip­u­la­tive’ ·         Traders, bro­kers seek pre­ven­tion of self-trades instead of penal­is­ing trades with­out any mali­cious intent ·         Mar­ket par­tic­i­pants sug­gest pre-trade checks at exchange lev­el to pre­vent such trades

Cur­rent­ly, there is no bar on self-trades — they are not always fic­ti­tious in nature and are part of nor­mal trad­ing activ­i­ty. The mar­ket reg­u­la­tor, how­ev­er, takes action against enti­ties doing this with mala fide intent under its Pro­hi­bi­tion of Fraud­u­lent and Unfair Trade Prac­tices relat­ing to Secu­ri­ties Mar­ket Regulations.

Sebi has con­veyed its intent to mar­ket play­ers and the lat­ter have protest­ed. In a let­ter to Sebi, mar­ket par­tic­i­pants have argued that impos­ing penal­ties on self-trades could fall in the realm of arbi­trary reg­u­la­to­ry action because in many cas­es there is no mala fide intent to manip­u­late the mar­ket dynamics.

“Penal­is­ing in cas­es of self-trades with­out going into the mer­it of each case would be detri­men­tal to gen­uine mar­ket trans­ac­tions,” said a par­tic­i­pant, who declined to be named.

Mar­ket play­ers argue that for­eign port­fo­lio investors and mutu­al funds often use the sec­ondary mar­ket route to trans­fer hold­ings from one scheme to anoth­er. In these cas­es, the cus­to­di­an on both the sell and buy side would be same, result­ing in self-trades. Sim­i­lar­ly, a deal­er can place the buy and sell order for the same stock in one day to get the advan­tage of intra-day price move­ment but with­out know­ing that the orders might get matched.

“It is not pos­si­ble for bro­kers to pre­vent self-trade from occur­ring alto­geth­er. Trades are exe­cut­ed in an exchange’s order match­ing sys­tems. Once an order is accept­ed by the trad­ing sys­tem, it is not pos­si­ble for the bro­ker to have con­trol over who the counter-par­ty is at the time of match­ing of that trade, as the trad­ing engine finds and match­es orders based on price time pri­or­i­ty,” the let­ter said.

Mar­ket par­tic­i­pants have asked the reg­u­la­tor to increase its checks and bal­ances to curb self-trades that are fic­ti­tious in nature. They have sug­gest­ed mech­a­nisms used by lead­ing glob­al stock exchanges includ­ing the New York Stock Exchange and Nasdaq.

“To pre­vent a poten­tial self-trade, a Per­son­al Account Num­ber (PAN) check is need­ed at the pre-trade lev­el. This would entail tech­ni­cal chal­lenges that need to be sort­ed at the exchange lev­el,” said an SMAC mem­ber, on con­di­tion of anonymity.

Cour­tesy: Busi­ness Standard