Sebi reverses stand on self-trades
Benefit of doubt will be given to entities that carry out such trades, but the Securities and Exchange Board of India will keep watch on possibility of manipulation
Mumbai: The markets regulator will give the benefit of doubt to entities that have carried out self-trades, or orders that match each other but does not result in ownership change, reversing an earlier stance that all such transactions were manipulative.
As many as 270,000 of the average 12.2 million orders executed in a day in the derivatives trading segment are self-trades, according to stock exchange data. Such trades can happen when dealers from the same brokerage trade using the same client code.
In December 2014, the Securities and Exchange Board of India (Sebi) said it was considering imposing fines on all self-trades. The move was opposed by many market participants. They claimed that not all such trades were done with the intent of manipulating the true level of liquidity in a security.
In 2015, National Stock Exchange Ltd and BSE Ltd put in place preventive mechanisms to check self-trades.
“Stock exchanges have already taken measures for preventing self-trades, no further action is envisaged in the matter,” Sebi said in a letter to the finance ministry, a copy of which has been reviewed by Mint.
The regulator was replying to the finance ministry in response to concerns raised by member of Parliament Gajendra Singh Shekhawat on Sebi’s selective action against certain brokers and entities found executing self-trades.
“Self-trades of the previous period (before the preventive mechanism was put in place by exchanges) that do not appear to be manipulative will not warrant any penal action. In cases that are pending investigation, they would be disposed of accordingly," a person with direct knowledge of the matter said, requesting anonymity.
An email sent to Sebi seeking comments on Friday was not answered.
“India goes overboard on acting on self-trades by regarding all self-trades as per se abusive,” an academic, who consults with the finance ministry on financial market regulations, said on condition of anonymity. “Global jurisdictions also frown on self-trades, but do not penalize bona fide self-trades; they take action only against self-trades that are manipulative in nature.”
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 the same, resulting in self-trades. Similarly, a dealer can place a 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-trades from occurring altogether. Once an order is accepted by the trading system, it is out of the control of a broker,” a person who runs a proprietary trading firm said on condition of anonymity.
However, Sebi will continue to be alert to instances where there is a possibility of manipulation, the regulator wrote in its letter to the finance ministry.