Supreme Court rules on synchronized trading case

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The Supreme Court in a landmark judgement ruled on whether synchronized/reversal trades executed in the futures and options segment of the stock exchange violate the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).

The parties-respondents in these appeals before the court were traders Rakhi Trading, Tungarli Tradeplace and TLB and brokers Indiabulls, Angel Broking and Prashant Jayantilal.

The bench of Justice Kurian Joseph and Justice R Banumathi delivered concurring judgments and held against traders who had executed non-genuine synchronized trades in the derivatives futures and options segment of the stock exchange with an intent to make predetermined gains/losses. The judges observed that synchronized trading takes the colour of fictitious trades intended to deceive lay investors and therefore violated the PFUTP Regulations.

The Supreme Court dismissed the appeals against the brokers due to lack of evidence suggesting any negligence or connivance on the part of the brokers while executing such non-genuine synchronized trades on behalf of their clients-traders.

“It is a welcome decision as the Supreme Court has upheld the sanctity of the screen based trading system,” said J Sagar Associates partner Mayank Mishra, whose firm represented Angel Broking. “By holding that mere use of brokers for facilitating a fraudulent synchronized transaction is not sufficient to charge the broker of offences under the PFUTP Regulations, the Supreme Court has struck a fine balance. Now a positive obligation is cast upon the regulator to adduce material evidence to prove the charge of ‘aiding and abetting’ to sustain a charge against the brokers.”

The Supreme Court upheld the 2009 order by SEBI which had fined Rakhi Trading ₹10.8 million (US$166,000). The Securities Appellate Tribunal had struck down the 2009 order in 2011 stating that the trade by Rakhi Trading did not affect the market.