NSE enforces institutional mechanism for brokers to curb market abuse

The National Stock Exchange (NSE) has issued a guidance note for stock brokers to ensure prevention and detection of fraud or market abuse. The guidelines follow Securities and Exchange Board of India’s (Sebi’s) directions to the exchange to enforce an institutional mechanism to curb market abuse.

 

The note, issued on Tuesday, details the mechanism to be followed by stock brokers for surveillance of client behaviour by analysing the pattern of trading, detection of any unusual activity being done by such clients, and reporting the same to stock exchanges and taking actions to prevent such fraudulent activities.

 

Brokers will have to monitor if the trades appear to be from mule accounts, are creating false impressions of artificial demand for a scrip, indicate price manipulation, front running, insider trading, circular trading, or pump and dump.

 

Sebi had first issued the circular in July 2024 where it had directed stock brokers with more than 50,000 active unique client codes (UCCs) to comply from January 1, 2025. It is to be implemented on other brokers in a phased manner, depending on their client size.

 

As per the NSE’s note, bigger brokers, often classified as qualified stock brokers, will have to appoint a Chief Surveillance Officer (CSO) and set up a separate surveillance department.

 

An automated system for alerts will be mandatory for brokers with over 2,000 UCCs, while the smaller brokers can continue to have a manual system. The exchanges will empanel the vendors for such surveillance systems.

 

“The trading members shall generate transactional alerts based on the criteria/red flag indicators provided by the exchanges from time to time, carry out review of the same and take the necessary action, wherever required,” states the guidance note by NSE.

 

Brokers will have to upload the status of alerts on a quarterly basis to the exchange within 15 days from the end of the quarter.

 

Further, the brokers have been directed to put in place a whistleblower committee for raising complaints and protection of the whistleblower.

 

“The complaints under this regulation against the board of directors, including those against the managing director, chief executive officer, key managerial personnel, designated directors or promoter shall be addressed to the audit committee or other analogous body of the trading members and the complaints against other employees shall be addressed to the compliance officer and shall be a part of the whistleblower policy,” notes NSE.