SEBI Order on Synchronised Trades

Last week, SEBI issued an order involving synchronised trading in the scrips of Adani Exports Ltd. The case involves a sharp spike in the price of the shares, more than doubling during a one-month period in November-December 2003. SEBI’s investigation revealed possible synchronised reversal of trades by certain individuals and entities that may have contributed to the price movement. While finding a violation of the SEBI Regulations against fraudulent and unfair trading practices, SEBI imposed a 2-year ban on certain persons from accessing the capital markets. SEBI’s reasoning is as follows:
g. The … facts demonstrate that the orders of most of the trades entered by the noticees were punched in with preconceived motive and prior arrangement that the orders would be picked up by a particular client of the group on the opposite side. I note that there is startling proximity in the time of entering of orders at the identical price and quantity resulting into the matching of the trades. This clearly indicates synchronization while entering the orders, even as these were executed on the screen of the exchange. A large number of trades got matched regularly. It is a known fact that persons who are unknown to each other cannot trade continuously by entering orders in such a pattern. It is difficult to accept that several different orders placed on various days always matched with the same entity and were also reversed with them, by mere co-incidence. The execution of synchronized/ reverse trades repeatedly for several days by the noticees reveals a definite nexus amongst them. I note that the orders placed by the noticees had split into multiple trades; however, the volumes generated by such trades have created substantial number of artificial trades in the market. I observe that the noticees had indulged in the trading pattern as discussed above with regularity, which also projected volumes in the scrip in a way that was not market determined, rather with a hidden motive to induce innocent investors to enter the market. Such transactions are clearly not genuine and seen to have been entered by the noticees for creating misleading appearance of trading in the scrip.
h.  … In the present case, the reversal of trades on several days clearly reveals manipulative intent. Additionally, these transactions, apart from creating artificial volume of trading, also influenced the prices, by giving an impression to others that the scrip is being actively traded at prevailing prices.

This is consistent with SEBI’s previous approach on synchronised trades. While synchronised trades per se do not appear to be objectionable, they could trigger the SEBI Regulations against fraudulent and unfair trade practices when they are coupled with manipulative intent and are entered into only with a view to artificially moving the price of the stock. 

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Only the other day regular visitors to these Blogs had the benefit of reading what Prof. Bala had to say and suggest; ref.>
    "SAT on Disclosures Regarding Promoters".

    Had one understood him rightly (open to be corrected, if wrong), his suggestions, though in brief , were intended to pinpoint, in one's sincere perception rightly so, certain deficiencies in the way the regulatory authorities, such as RBI and SEBI, have been functioning; and why the dire need for improving upon, though exclusively in the interests of that section of the 'stakeholders' who have proven themselves time and again to belong to the often so- categorized 'gullible' section of the people.

    Even a total stranger,nay a sworn enemy, to any such mundane realm of life as stock-trading or stockbroking, must, in all fairness, be taken to have realized the the usefulness of the clues provided by the Professor.

    His suggestions, as were observed, carry his conviction of what ideally required is a sort of 'investigative functioning' (akin to 'investigative journalism', or the like), as opposed to 'routine functioning'. Should that be so, then this article , in particular the SEBI's reasoning as reproduced (see inset , g. and h.), it appears, bears out the noticeable change for once, perceptibly for the better, on the part of SEBI in working towards accomplishing what it is expected of it.

    Only one remark: What is seen to be intriguing is the word,- 'I', in the opening of the cited report from the SEBI. One would have thought that the SEBI, as a highly responsible regulatory authority, was supposed to discharge its responsibilities as a collective body, and/or at least make it appear/seen that it is so. Not depending only, that is entirely or exclusively, on the views of any individual, including the chairman, being a part of such a collective functionary/ body. Possibly, that is just one of those common 'slips' often met with.

    The foregoing are, admittedly, reactions from a novice in such societal- economic matters. May be, Prof. Bala, as a noted expert on the subject, if he shares his own views, help in throwing properly focused light.

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