In the first ever enforcement order of its kind in the futures & options (F&O) segment, market regulator Securities and Exchange Board of India (Sebi) has directed 15 stock brokers and 10 entities to “cease and desist” from F&O dealings in the National Stock Exchange (NSE) till further orders. The Sebi order is based on preliminary examinations carried out by it, based on the alerts generated by its newly installed Integrated Market Surveillance System (IMSS) in some illiquid options contracts. The 10 entities and 15 brokerages warned include Indiabulls Securities, Angel Capital, SMC Global Capital and Khandwala Financial Services.In his 40-page order, Sebi wholetime member G Anantharaman said, “it was observed that some of the brokers at the NSE have been trading in futures and options contracts in a peculiar manner. The brokers have been buying and selling almost equal quantities of contracts within the day and such buy/ sell was synchronised in nature.” The Sebi action follows a probe into the trading data of the F&O segment in the NSE — which attracts a daily turnover of Rs 40,000 crore — for the period January to March 2007.In most of the cases, the same quantity and in a few cases, substantially the same quantity of the original trade was closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed — without significant variations in the traded price. “The observations, as indicated above, raised severe surveillance concerns with respect to genuine trading and price discovery in this segment as well as market integrity from an investor protection point of view,” he said.According to Anantharaman, the trading data of the brokers was analysed to find out those deals where there was a buy or a sell transaction for a particular client and the same was reversed on the same day. Examinations of such transactions brought out that the reversal of trade was being done either for the entire quantity of the contract or substantially the same quantity with the same opposite party. “Reversal of trade implies that where a buy transaction has been initially entered into by a broker for a particular client for a specific quantity, there is a corresponding sale transaction which takes place during the day for the same quantity between the same set of broker/ clients and vice versa,” Sebi said. However, the difference in the prices at which the above two trades were executed was very significant whereas such differences were not observed in the price of the underlying shares. It was also observed that there were several brokers who were trading in the F&O contracts in a synchronised manner during the period. “Additionally, it was also seen that one of the parties to the transactions apparently had substantial gains while the other party suffered losses in such transactions,” Sebi said. Such gains and losses are termed Close Out Differences (CODs) and transactions are called reversal of trades. The findings of the preliminary examination have brought out that the F&O segment is awash with transactions undertaken by brokers and clients which are essentially non-genuine. Such transactions are in the nature of fictitious transactions, resulting in the creation of misleading appearance of trading in these options.According to Sebi, brokers have transacted in both types of contracts futures as well as option contracts. Further, it was also seen that in several cases, the same broker was appearing both on the buy side and the sell side of the transaction. Curiously, such transactions also resulted in unusual profits and losses for these entities. The motive of such transactions was not genuine purchase and sale but rather seemed to be, to create an artificial market for trading in F&Os and booking profits/ losses on such transactions.The transactions resulted in substantial book losses for one client and profit for another. “The range and scope with which such transactions have been carried out seems to suggest that there is a thriving market, providing the opportunity to avail of favourable tax assessments,” the order said.
