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Not all ‘self-trades’ are manipulative: Tribunal to SEBI

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The Securities Appellate Tribunal (SAT) has reiterated that not all ‘self-trades’ are manipulative. SAT has said that manipulation should be backed by an intent whereas self trades may occur inadvertently.

In a recent order in the matter involving Crosseas Capital, a large algo trader, SAT directed SEBI to take a relook at its 2015 order where it found that the volume of transaction in ‘self trades’ was incorrectly calculated by SEBI’s assessing officer (AO).

RegStreet Law advisors represented Crosseas.

Cases involving trade orders worth several crores have been classified as ‘self-trade’ and are under SEBI scanner. SEBI had imposed a heavy penalty on Crosseas Capital for large number of ‘self trades’ executed at the brokers end in 2011 during trading in a newly-listed company shares.

SAT also went into the arguments to see what self-trade exactly means or if such trades can lead to manipulation. SAT observed that self-trades placed through algo trading software using different terminals through the same broker, may get matched accidentally without any manipulative intention.

“As such, mere occurrence of self-trades may be accidental but still would attract the provisions of prevention of fraudulent and unfair trade practices if any additional material, evidence or circumstances are available to indicate manipulation of the price or volume of the scrip or creation of false or misleading appearance of trading in securities market resulting from such self-trades.”

‘Misleading appearance’

In its 2011 order against Crosseas Capital, SEBI had observed ‘the brokerage conducted large self- trades with an intent to create misleading appearance of trading without intention to change the ownership of such securities’. SEBI held that such manipulative act and failure to comply with the Code of Conduct had violated its regulations of prevention of unfair trading practices and stock broker regulations.

SAT referred to an earlier court order involving a trader where manipulation was established on the basis of intention. SAT also quoted SEBI’s own 2017 circular where the regulator had argued that all self-trades should not be considered illegal “in the absence of any other additional evidence to prove manipulation or intent to defraud as is done in cases of synchronised trades. Therefore, in all matters of self-trade, an assessment has to be made regarding whether the said trade was intentional or unintentional on the basis of supporting evidence and the manipulation caused by indulging in self- trades should be clearly brought out.”

Sudar Industries’ case

On March 11, 2011, Sudar Industries got listed and its price price rose by 47 per cent that led to SEBI investigation. The regulator issued a show-cause notice in 2015 and imposed a penalty of ₹1.1 crore on the broker. SEBI assessing officer found that total market volume constituted by the appellant in the scrip by way of self-trades was around 4 per cent and took the total market volume into consideration to be substantial creating misleading appearance of trading with the intention of misleading the market. The lawyers for the broker argued that the finding given by the AO that the appellant had self-traded around 4 per cent of the total market volume in the SIL scrip was factually incorrect. It was urged that the total percentage of self-trades was only 1.95 per cent of the total market.

The AO has considered other aspects and found that the execution of self-trades by the appellant was manipulative. But SAT citied various instances and orders to state that manipulation could only be established if there was an intent to do so.