Supreme Court upholds Sebi order against Rakhi Trading to nail culprits

Naive to say that the screen-based trades are anonymous and not synchronised, rules apex court setting aside SAT order

The Supreme Court (SC) has upheld a 2009 order against Rakhi Trading by Securities and Exchange Board of India (Sebi), providing a shot in the arm to the market regulator's effort to nail culprits indulging in manipulative practices such as “synchronised trading”.

The market regulator had imposed a penalty of Rs 10.8 million on the trading firm in March 2009 for allegedly creating artificial volumes of futures & options (F&O) on the National Stock Exchange through ‘reversal of trade’ route. However, the order has been struck down by Securities and Appellate Tribunal (SAT) in 2011.  

Setting aside the SAT observation in the matter, SC in its February 8 order said, “the impugned transactions are manipulative/deceptive device to create a desired loss and/or profit. Such synchronised trading is violative of transparent norms of trading in securities. If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside.”

It further said, "Considering the reversal transactions, quantity, price and time and sale, parties being persistent in the number of such trade transactions with huge price variations, it will be too naïve to hold that the transactions are through screen-based trading and hence anonymous.

SAT in its 2011 had said, “The impugned trade of the appellant (Rakhi Trading) in the F&O has no impact on the market, we hold that they did not violate the regulations.”

The apex court, however, noted that tribunal's view could be overlooking the prior meeting of minds involving synchronisation of buying and sell order and not negotiated deals.

A 'synchronised' trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. Every buy and sell order has to match before the deal can go through.

In 2007, suspecting manipulation in the trading of F&O, Sebi probe found that Rakhi Trading and some other firms were buying and selling derivatives in equal number within a day. Accordingly, the regulator imposed penalty order.

The trading firm contented the move in SAT and claimed that there was no price manipulation. Citing SAT earlier order in the Ketan Parekh case, the trading firm said that tribunal had held that such synchronized trades are not illegal and in F&O trade there is no concept of change of beneficial ownership.