Sebi considers penalties to prevent self-trades

Concerned that ‘self-trades’ are disturbing market equilibrium, the Securities and Exchange Board of India (Sebi) is planning penal action against market participants doing this.

Sources say the market regulator has seen an increase in such trades, with the aim of creating artificial volumes and to manipulate prices. Trades where the buyer and seller are the same and not resulting in a change of ownership are termed self-trades. Typically, these occur when multiple dealers from the same broking house carry out trades using the same client code.“The issue was discussed at a recent meeting of Sebi’s secondary market advisory committee (SMAC). Based on the recommendations, Sebi plans to penalise brokers and traders found to be executing self-trades,” said a person close to the development.

Currently, there is no bar on self-trades — they are not always fictitious in nature and are part of normal trading activity. The market regulator, however, takes action against entities doing this with mala fide intent under its Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations.

Sebi has conveyed its intent to market players and the latter have protested. In a letter to Sebi, 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 mala fide intent to manipulate the market dynamics.

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

Market players argue that foreign portfolio investors and mutual funds often use the secondary market route to transfer holdings from one scheme to another. In these cases, the custodian on both the sell and buy side would be same, resulting in self-trades. Similarly, a dealer can place the buy and sell order for the same stock in one day to get the advantage of intra-day price movement but without knowing that the orders might get matched.

“It is not possible for brokers to prevent self-trade from occurring altogether. 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 counter-party 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 asked the regulator to increase its checks and balances to curb self-trades that are fictitious in nature. They have suggested mechanisms used by leading global stock exchanges including the New York Stock Exchange and Nasdaq.

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