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Supreme Court on synchronised trading and market manipulation

Finsec Law Advisors

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In a judgment passed on February 08, 2018, the Supreme Court held that non-genuine synchronised trading which affects the integrity of the markets would be in violation of the SEBI (PFUTP) Regulations, 2003 and for this, actual manipulation of the markets by such transactions need not be proved.

A ‘synchronised’ trade is a pre-negotiated and pre-planned trade wherein buyers and sellers enter the quantity and price of shares they wish to transact at nearly the same time. Three traders engaged in synchronized trading in the Nifty Futures segment, where one party booked profits and the other booked losses, for the ostensible reason of tax planning. As the trades were reversed within seconds, there was no settlement of accounts between the parties, or transfer of beneficial interest in those securities, SEBI found the traders to be guilty of unfair trade practices. On an appeal, the Securities Appellate Tribunal (SAT) rejected SEBI’s views and observed that the Nifty index consists of a very large, well-diversified portfolio of stocks which is not capable of being influenced, much less manipulated. As there was no manipulation of the market, SAT held that the traders were not guilty of unfair trade practices.

On the question of whether manipulation of the market was required to trigger the provisions of SEBI (PFUTP) Regulations, the Supreme Court rejected SAT’s observation and held that intentionally trading for loss is not a genuine trade and through these orchestrated trades other investors have been excluded from participating. It held that compromising the integrity of the market is sufficient and manipulation of the markets is not necessary to be established for a synchronized trade to be in violation of SEBI (PFUTP) Regulations.

Further, while SEBI held the brokers executing the trades to be in violation of the regulations, the Supreme Court dismissed allegations against the brokers by stating that merely because a broker facilitated a transaction it cannot be said that there is violation of the regulations.

This judgment has thus set a fair precedent that intentionally synchronising trades would be considered to be unfair trade practice due to their adverse impact on the efficient functioning of the stock market, even if there is no real market manipulation.