Sebi asks exchanges to crack down on frivolous trades

Says trade for annulment can be taken up either suo moto by the stock exchange or upon receipt of request from a stock broker

To tackle the menace of freak and erroneous trades, markets regulator Sebi today asked stock exchanges to penalise brokers placing erroneous orders and discourage the annulment requests.

Erroneous or freak trades also include trades taking place due to malfunctioning of a trading system, as also the transactions executed due to a punching error by a dealer, which in the market parlance is known as 'fat-finger trades'. There have been some cases where overall markets have also taken a hit due to such 'erroneous' trades.

The stock exchanges are empowered to annul trades and they have their own bye-laws to deal with such cases.

To bring in uniformity and transparency, the market regulator said in a circular today that examination of trade for annulment can be taken up either suo moto by the stock exchange or upon receipt of request from a stock broker.

"Stock exchanges shall define suitable criteria so as to discourage frivolous trade annulment requests from the stock brokers," Securities and Exchange Board of India (Sebi) said.

The exchanges would have to adopt a transparent and time-bound approach to decide upon cases related to annulment of trade before making the final settlement.

For cancellation of trade, stock brokers would have to submit such request to the stock exchange within 30 minutes from execution of trade which is sought to be annulled.

However, the exchange may consider requests received after 30 minutes, but no longer than 60 minutes, only in exceptional cases and after examining and recording reasons for such consideration.

"The stock exchanges shall expeditiously, not later than start of next trading day, examine and decide upon such requests," Sebi said.

The regulator has said as the decision to cancel trades impacts a large set of market users, it should only be invoked in the interest of the market at large.

In addition, stock exchanges need to implement a suitable framework to penalise stock brokers who place erroneous orders.

The exchanges have to put in place necessary systems for implementation of the circular within one month.

"Stock exchanges shall undertake annulment or price reset only in exceptional cases, after recording reasons in writing, in the interest of the investors, market integrity, and maintaining sanctity of price discovery mechanism," Sebi said.

Generally, 'price reset' is a mechanism where the price of executed trades are adjusted to a new determined price.

Besides, Sebi has provided a mechanism to review the decision taken by the stock exchange. However, the aggrieved party would have to submit such request to the exchange before the payout deadline of the trades.