Foreign broker Morgan Stanley France SA, which allegedly allowed Reliance Strategic Investments (RSI) to conduct manipulative trade in the derivatives market in 2017, has settled its case with market regulator SEBI by paying a fine of ₹25.30 lakh.

RSI is a company belonging to the Reliance Industries Group and as per SEBI’s show-cause notice (SCN) it had entered into several long-dated Nifty index options trades at a whooping discount to the market price of the underlying index. Morgan Stanley was the broker for these trades and it has now settled the case with SEBI without acceptance or denial of guilt under SEBI’s consent mechanism. 

SEBI’s order does not mention the total value of the alleged manipulative trade undertaken by RSI. But the regulator’s SCN reveals that RSI, on July 31, August 8 and 10 of 2017, executed various combinations of long-dated deep in-the-money (ITM) options on Nifty expiring on December 28, 2017, with Morgan Stanley.

Deep ITM trades

Investigation revealed that although at the time of entering into the trade for 11400 Nifty Put Options, RSI and Morgan Stanley knew, on the basis of their research/understanding, that the eventual trade of 11400 PE was not the correct price. The SEBI probe revealed that the trades were executed at a discount of 15 per cent, 35 per cent and 37 per cent of the then implied volatility based on a mutual arrangement to adjust all the costs of running various positions on just one strike (away from the fair price of an instrument) which was not observed to be a valid reason to execute the trade. 

Hence, SEBI alleged that such act of trading 11400 put options at a price on the basis of mutual arrangement amounted to active concealment of understanding of Reliance Strategic Investments and Morgan Stanley. 

“Possible cost adjustment amounts to fraud as defined in Regulation 2(1)(c)(3) of PFUTP (Prevention of Fraudulent and Unfair Trading Practices). Further, it was alleged that trading pattern of RSI and Morgan Stanley negotiating prices of various long-dated deep ITM ill-liquid index options amounted to / resulted into manipulation of the price of 11400 PE.

SEBI said such acts which resulted into manipulation of the price of the contract could potentially mislead other traders/investors with regard to likely future price of the underlying/ contract who were unaware of arrangement between RSI and Morgan Stanley and would not be desirable practice for orderly functioning of the market, SEBI said.