Co-ordinated crime

| Updated on February 11, 2018 Published on February 11, 2018

SC’s ruling on synchronised trading strengthens SEBI in prosecuting cases of price rigging

In the stock market, big-ticket crimes involving insider trading, front-running or price rigging hog the limelight. But one widely-used market manipulation device that flies under the radar, mainly because it involves small entities and obscure stocks, is illegal synchronised trading. In this, two parties place premeditated orders for identical quantities of stock at a pre-decided price. Reversal trades exactly mirror these positions. While there is nothing prima facie wrong with either kind of trade, when used in tandem, without any securities changing hands, they artificially bid up stock prices and drum up illusory volumes. Such trades are part of the standard modus operandi of operators trying to lure lay investors into obscure stocks. While SEBI has investigated a few such cases over the past decade, the most high-profile one being the Ketan Parekh case, it has had mixed success with making its charges stick. But a Supreme Court ruling last week, upholding SEBI’s penalty against three small-time market players for illegal synchronised trading, clarifies important points in law and strengthens SEBI’s hand in prosecuting such cases.

In the instant case against Rakhi Trading and others, SEBI had contended that, by executing synchronised and reversal trades in 13 Nifty options contracts at varying prices, the accused had manipulated the market to book artificial losses for tax purposes. The Securities and Appellate Tribunal (SAT), while admitting that the trades were synchronised, held that they did not amount to market manipulation because derivative trades cannot influence the market (Nifty index) and moreover do not entail delivery. SEBI alleged that the fictitious trades created false liquidity in the Nifty options contract, manipulating the market. But the SAT countered that while artificial volumes in the cash segment could influence lay investors, they wouldn’t have the same impact on informed F&O investors. The SC has now overturned the SAT’s contentions and taken a far more stringent view. It has held that orchestrated trades, whether in the cash or derivatives segment, are a misuse of the market mechanism. Resorting to such sham trades is therefore an unfair and manipulative trade practise. The court has also held that by indulging in non-genuine trades, the parties interfered in the free and fair operation of market forces. Undermining price discovery and market integrity are serious market offences, it has ruled, even without proof of actual losses to investors. Given that SEBI has had a tough time establishing mala fide intent and quantifying losses in past cases, this is a shot in the arm for its future enforcement actions.

While the court’s intervention is welcome, it is noteworthy that it has also asked SEBI to tighten rules on market manipulation. The one disconcerting fact, though, is the inordinately long time it has taken for this denouement. Given that these manipulative trades occurred in 2007, it is doubtful if these belated and mild penalties will serve as any serious deterrent to other manipulators.

Published on February 11, 2018
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