Trading in illiquid stock options and managing non-genuine trades impact the market and investors -THE SECURITY AND EXCHANGE BOARD OF INDIA

Trading in illiquid stock options and managing non-genuine trades impact the market and investors -THE SECURITY AND EXCHANGE BOARD OF INDIA

The board observed some large scale trade reversals and creation of artificial volume in the stock options segment and the notice(Ms. Madhumita Gupta) was alleged for these trade reversals and the allegations of violating  the provisions of regulations 3(a),(b),(c),(d) and regulations 4(1),4(2)(a) of the SEBI  Regulations, 2003 and investigation was conducted and under section 15-I of the Securities and Exchange Board of India Act, 1992 was appointed  KRANTI SARDESAI ADJUDICATING OFFICER in Order No -Order/KS/JT/2021-22/14744

The background of the case is a total of 2,91,744 trades comprising 81.38% of all the trades executed in the Stock Options Segment at the BSE these trades involves the reversal of buy and sell positions of clients and parties on the same day and the noticee was found suspicious of these trades and a Notice under Rule 4(1) of the Adjudication Rules was send to understand why penalty should not be imposed against the noticee and  It was inter alia alleged in the SCN that the Noticee had executed 2 non-genuine trades in 1 Stock Options contract which resulted in an artificial volume of total  1,25,000 units.

In reply to this SCN, noticee stated that the basis of the alleged definition of reversal trades and which authority has been relied on in this context. No documents in this regard have been provided and there is no material on record in these proceedings further the noticee was unaware of the broker and other parties and there is no evidence that shows there was any meeting of minds in the matter the noticee further stated that Reversal Trades are also per se not illegal, the trade executed by the Noticee in a well-known company on BSE Stock Option Segment per se cannot be held illegal and all the trades conducted by the noticee are genuine and cannot be considered as non-genuine, hence As none of the acts or trades executed by the Noticee fall under the definition of fraud as provided in regulation 2(1) (c) of PFUTP Regulation, the genuineness of the trades executed by the Noticee can be questioned and therefore, the Noticee cannot be alleged to have violated any PFUTP Regulations.

The adjudicating officer made further observations and is convinced that execution of trades by the Noticee in the illiquid options segment with such precision in terms of order placement, time, price, quantity, etc. and also the fact that the transactions were reversed within a few seconds with the same counterparty indicates a prior meeting of mind to execute the reversal trades at a pre-determined price and the trading behavior of the noticee was not normal and was irregular and this all indicate that the trades executed by the Noticee were not genuine and being non-genuine, created an appearance of artificial trading volumes in the contract. This concludes that Noticee was non-genuine and has created a false or misleading appearance of trading in terms of artificial volume in stock options and therefore the same is manipulative and deceptive.

The officer founds the noticee liable for violating the provisions of Regulations 3 (a), 3(b), 3(c), 3(d), 4(1), and 4(2)(a) of PFUTP Regulations and puts a penalty of 5,00,000 on the noticee

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Order reviewed by Naveen Sharma

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