BackBSE extends self-trade prevention mechanism to equities segment
The STPC, aimed at limiting circular trading, was already in force in the stock exchange’s derivatives segment
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Mumbai: Asia’s oldest bourse, BSE Ltd, on Monday extended its clampdown on individual self-trades designed to manipulate stock prices, extending a mechanism currently in force in derivatives segments to the equity cash segment.
A self-trade refers to the same entity placing a buy and a sell order in the same stock through the same broker. A self-trade is a form of circular trading, over which the regulator has expressed concerns as such trades could be used to drive up stock prices.
The mechanism, called self-trade prevention check (STPC), will take effect on 16 March, a BSE circular said.
Brokerages find it difficult to check such trades in real time and have wanted exchanges to implement a mechanism for the same.
A couple of months back, the Association of National Exchanges Members of India (Anmi), an umbrella body of brokerages, had submitted a formal proposal in this regard to the exchanges and the Securities and Exchange Board of India (Sebi).
“A formal submission was done after studying the global best practices across exchanges. For a broker, it is difficult to check a self-trade at the order book stage, though it can be done post the execution. By then, the damage has already been done. Exchanges as the first-level regulator are better equipped to manage this," said a person who was part of the discussions between the brokerages and exchanges.
He did not wish to be named as he is not authorized to speak to the media.
Responding to an email query, a BSE spokesperson said that STPC will ensure that only genuine orders flow through the market.
“Self-trade prevention check is a feature that prevents matching between a buy and a sell order entered by a member in the same order book, for the same client code originating from same or different trading terminals of that member," said the BSE spokesperson.
The exchange, however, has kept institutional orders outside the purview of STPC as brokerages do execute genuine deals at times to move shares from the account of one institutional client to another.
But the system will check if both the buy and sell orders have originated from institutions and will reject the trade if any one leg of the trade is non-institutional. Also, block deals have been exempted from this check.
According to a spokesperson for National Stock Exchange of India Ltd (NSE), the exchange has had a self-trade monitoring system in place since February 2014 and action has been taken based on surveillance results. The spokesperson further added that the systems are always open to upgradation based on the advice received from the capital market regulator.
Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd, says that though self-trades are common in the market, most of the times they are intentional. The new checks and balances will eliminate such instances and make circular trading much more difficult, he said.
However, STPC may not be able to completely put an end to circular trades.
“While one can safely say that most self-trades qualify to be circular trades, the opposite is not always true. BSE will only check for trades at a single member level. Sebi will still have to use its integrated market surveillance systems to identify circular trades done using various brokerages," said a person familiar with market functioning. He declined to be identified.
Sebi defines circular trading as an action by a single entity or a group of entities that enter buy and sell orders with an intention to manipulate the price of a share or create artificial or false market demand. Most times, entities use trading accounts across various brokerages to carry out such trades.
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