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SEBI Order on self trades: Crosseas Capital Services Private Ltd

Finsec Law Advisors

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The Whole Time Member, SEBI passed an order dated 13 November, 2014, in respect of a stock-broker, Crosseas Capital Services Private Ltd., for engaging in self trades. SEBI had alleged that Crosseas conducted self trades in the BGIL-scrip on the listing day and contravened the provisions of the SEBI Act, 1992, PFUTP Regulations and the provisions and Code of Conduct under the Stock Brokers and Sub-Brokers Regulations, 1992. The Adjudicating Officer on 30 April, 2014, found that Crosseas undertook jobbing activities/proprietary trading and the self trades were a mere technological by-product of high-speed trading. Despite the AO having disposed of the case without any penalty, the matter was called for re-examination in terms of Section 15-I (3) of the SEBI Act. This is one of the first cases where SEBI exercised its powers under the newly inserted Section 15-I (3) as it considered the AO’s observations to be erroneous, and imposed penalty.

The WTM stated that self trades are fictitious and a stock broker could adopt any business model so long as it complied with the regulatory framework. The WTM observed that all prohibitions governing order placement through manual means would equally apply to algo trading. The algo trading software utilised by Crosseas should have been written in a manner such that it complied with the law and avoided self trades. The WTM found that Crosseas had not exercised due care and diligence in the conduct of its business and its inability to prevent self trades while using its algo trading system, meant that it had contravened the provisions of the PFUTP Regulations. The WTM directed Crosseas to take measures to avoid trades prohibited under SEBI guidelines and imposed a penalty Rs. 5,00,000.

The WTM order did not recognize the inherent difference between self trades happening manually and self trades happening under the algo trading software, wherein the orders are generated using pre-programmed computer software systems. The order found Crosseas in violation of the provisions of the PFUTP Regulations without proving its intention to manipulate, which should trigger alarm bells for algo traders. Most algo trading transactions will result numerous self trades due to the inherent nature of high-speed multiple trading software. Therefore it would be more prudent for SEBI to build a separate regulatory mechanism for algo trading to protect the industry from future censures.