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Veena Venugopal

Mumbai , April 11

THE increasing number of instances of conflict of interest between stockbrokers' own investments and their clients' accounts has reached alarming proportions now.

Brokers' proprietary positions, where they invest their own money in the stock market, have been on the rise, with the numbers disturbingly high in the futures and options market.

According to data from the NSE, in the futures and options segment the average daily proprietary position of nearly 63 per cent of the brokers was above 20 per cent for March 2005.

In fact, the proprietary position of 50 brokers in the segment was 100 per cent, indicating that their entire investments for the month were for themselves rather than their clients.

In the cash segment, over 42 per cent of brokers had 20 per cent proprietary exposure.

The increase in brokers' own investments in the markets is sometimes seen to conflict with the positions they take on behalf of their clients.

"There is a possibility that the broker can book losses from trading in stocks he has bought on his own account to his clients' books. Similarly, profits gained from investing the clients' money can be moved to the broker's own account. The allegations of conflict of interest arise from this possibility," said a broker.

Some of the brokers have very strong proprietary positions. Brokers need to think whether there is an increasing conflict of interest between proprietary positions and client servicing needs and what can be done to segregate these two, according to Mr Ravi Narain, Managing Director and CEO, NSEIL.

One of the ways that has been suggested is for brokers to set up different subsidiaries dealing solely with either the proprietary account or the client account.

Books for one line of business would have to be completely separated from the other, which will minimise potential conflicts of interest.

Mr Justice Kumar Rajaratnam, Presiding Officer of the Securities Appellate Tribunal, said: "There is an apparent conflict of interest. Most brokers are transparent and honest and would not like the charge of this conflict of interest. So, it would be better if we had a system of `embedded brokers'."

He added: "These embedded brokers would be those who will not have any proprietary books and brokers wanting to trade for themselves can approach them."

This system effectively eliminates proprietary books altogether.

Although the SEBI has not taken steps to formally regulate the proprietary accounts of brokers, the buzz in the capital market circles is that it may soon be convinced of the need.

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