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Sebi considers penalties to prevent self-trades

The Securities and Exchange Board of India (Sebi) has expressed its concern over the increasing occurrence of self-trades, stating that such practices fall in the realm of manipulative trades aimed at artificially increasing trade volumes.

A self-trade takes place when the buyer and seller are the same entity, which may result because of algorithmic trading.

According to markets experts, self-trades occur when clients willingly buy and sell the same stock to artificially boost volumes and execute fictitious trades.

Based on the recommendation of Secondary Market Advisory Committee (SMAC), Sebi will now penalise brokers and traders if they are found to be executing self-trades, particularly while punching in algorithmic, or algo, orders.

Sebi’s investigation department had raised its concerns over self-trades with SMAC in January this year and sought relevant provisions to prevent execution of such transactions. 

As per current Sebi provisions, the execution of self-trade is not prohibited. However, self-trade with intention to inflate prices and volumes could be prohibited under fraudulent and unfair trade practices (FUTP).

The regulator’s intent to penalise self-trades has the trading community worried. In a letter to the regulator, market participants have argued that imposing penalties on self-trades could fall in the realm of arbitrary regulatory action because in many cases there is no malafide intent to manipulate the market dynamics.

“Penalising in cases of self-trades without going in the merit of each case would be detrimental to genuine market transactions,” said a market participant, who declined to be named. 

Market participants have argued that foreign portfolio investors (FPIs) and mutual funds use the market route in order to transfer their holdings from one scheme to another. In these cases, the custodian on both the sell and buy side would be the same. Similarly, a dealer can place the buy and sell order for the same stock in one day to get advantage of intra-day price movement, but without knowing that orders may get matched.

“It is not possible for the brokers to prevent such a self-trade from occurring. Trades are executed in an exchange’s order matching systems. Once an order is accepted by the trading system, it is not possible for the broker to have control over who the counterparty is at the time of matching of that trade as the trading engine finds and matches orders based on price time priority,” the letter said.

Market participants have said that exchanges should adopt a mechanism to prevent self-trades from getting executed and take cues from global exchanges that have adopted similar practices, including the New York Stock Exchange (NYSE) and NASDAQ.

“In order to prevent a potential self-trade, Personal Account Number (PAN) check is needed at pre-trade level. This would entail technical challenges that need to be sorted at exchange level,” an SMAC official said, on condition of anonymity. 

In India, so far only Multi Commodity Exchange (MCX) has adopted self-match prevention functionality.

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