Sebi probes broker-operator nexus

Finds brokers renting out terminals to market operators for self-trades, with artificial pumping of price and volume

The Securities and Exchange Board of India (Sebi) is probing instances of brokers leasing their terminals to stock market operators who use the trading system to create artificial volumes in shares and manipulate prices.

The regulator has found several such instances, of brokers renting their terminals to operators for 'unauthorised activities', said sources.

They add that its Integrated Surveillance Department, which monitors market activity using analytical software, has generated several ‘self-trade alerts’ on hectic buying and selling. If a broker leases out about a dozen terminals to operators and one buys some shares and the second operator sells the same shares, it gets termed a self-trade. As the beneficial ownership of the stock remains with the broker, experts say it is difficult to justify these.

The price movements and volumes in these stocks were unusual and not in line with the trends in the index or its peers, which catches the regulator's attention, sources said. Brokers and operators who do this in a more structured manner could go unnoticed, they said.

Names of the brokers under Sebi investigation couldn’t be ascertained. Most of these are proprietary brokers, with little or no retail or institutional clientèle. The bulk of these are based out of Mumbai, Ahmedabad, Delhi and Kolkata, said people in the know.

Operators and brokers, sources said, operate on a 70-30 profit sharing model. Operators try to gain from jacking up share prices or volumes artificially and brokers get a cut.

Market players said poor market conditions could be driving brokers towards such malpractices. “Typically, proprietary brokers trade in their own account by either exploring arbitrage opportunities or sometimes taking positional trades. However, given the drying of secondary market volumes and the increasing cost of compliance, some of these brokers could be resorting to such unauthorised practices, to help tide over poor market conditions,” said an official with a domestic brokerage.

Daily average trading turnover in the cash segment of the National Stock Exchange and the BSE during the first half of 2013 has been Rs 13,240 crore. The volume is only slightly down compared to the same period last year, though off by more than 30 per cent compared to 2008 levels.

In the past, there have been several instances where the market regulator has been able to indict brokers or their clients in the case of generation of self-trades, a breach of the Sebi Fraudulent and Unfair Trade Practices Regulations.

In a separate incident, NSE last week had barred 26 entities from the stock market in a matter related to trading by Prime Broking and activity in the shares of Gitanjali Gems.
Unholy friendship

• Terminal leasing by brokers to operators catches Sebi attention
• Operator-brokers working on 70-30% profit model
• Operators use terminals to create false market
• Several ‘self-trade’ alerts generated by Sebi surveillance system
• Sebi could charge brokers for FUTP violations