SEBI conducted an investigation into the trading activities of certain entities in Illiquid Stock Options at BSE for the period April 1, 2014 to September 30, 2015.
It was observed that during the investigation period, total 2,91,643 trades comprising substantial 81.38% of all the trades executed in Stock Options Segment of BSE were found to be non-genuine trades. The aforesaid non-genuine trades resulted into creation of artificial volume to the tune of 826.21 Crore units or 54.68% of the total market volume in Stock Options segment of BSE during the investigation period.
It was observed that the said non- genuine trades were not restricted to any specific contract or between any specific set of entities. It was observed that Mr. Pradeep Kumar Kyan (hereinafter referred to as “Noticee”) was one of the various entities who were indulged in execution of non-genuine trades in Stock Options Segment of BSE during the investigation period. The following points narrate the dealings of the Noticee during the investigation period and the allegations against it for execution of non-genuine trades.
As regards to all the dealings of Noticee in the Stock Options segment of BSE during the Investigation Period, it was observed that the Noticee had traded in 34 unique contracts, from which it has allegedly executed non genuine trades in 34 contracts wherein it executed total 93 non-genuine trades, which resulted in artificial volume of total 121,34,836 units.
It is established that reversal trades are not normal transactions and it clearly demonstrates beyond reasonable doubt that the Noticee had intentionally executed these trades and manipulated the volume by artificial trading pattern in 34 contracts. Out of the 34 contracts, in respect of 1 contract, all the trades were non genuine trades, which contributed to 100% artificial volume.
I am of the view that the misuse of stock options as shown above not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen based electronic trading system and price discovery mechanism by repeated execution of pre decided reversal trades at irrational / arbitrary prices. Moreover, the impact of such trading on the traded volume and the price of stock options contracts is huge. Such activity deliberately or otherwise damages market integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their trading/investment decisions. Options as financial instruments, ordinarily, provide hedging avenues to investors. The trading pattern of the Noticee in the instant matter was abnormal and was designed to create artificial volumes in the illiquid stock options, fail to justify any of the normal strategies of hedging/ speculation/ arbitrage. In my view, the abuse of such financial instruments, which are made available to the investors for the purpose of protection of their investment portfolios from the risks of adverse price movement, cannot be tolerated and needs to be dealt with strictly.
I find that the Noticee by indulging in execution of reversal trades in Stock Options with same entities on the same days, had created artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE and therefore violated the provisions of Regulations 3(a), 3(b), 3(c), 3(d), 4(1), and 4(2)(a) of PFUTP Regulations. Accordingly, the Noticee is liable for appropriate monetary penalty under Section 15HA of SEBI Act, 1992 the provisions of which are furnished hereunder.
Section 15HA of SEBI Act – Penalty for fraudulent and unfair trade practices
“If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty five crore rupees or three times the amount of profits made out of such practices, whichever is higher”.
I note from the facts of the case that the first leg of trades of Noticee were reversed within a few seconds/minutes of such trades, with the same counter party, at such option prices which no rational investor would undertake, as explained in above paras. Consequent to such manipulative trades, both the parties of the trades could structure and generate profits/ loss in their accounts wherein profit/ loss made by one entity was exactly equal to the loss/ profit made by the counterparty.
Considering the above, I am of the view that it will be appropriate to take into account the payoff of transactions between the two parties together, rather than viewing it independently. Therefore, in respect of the non-genuine trades carried out by the Noticee which resulted in creation of artificial volume in Illiquid Stock Options, it is not possible to quantify the amount of disproportionate gain or unfair advantage made by the Noticee. Further, there is also no material on record to assess the amount of loss caused to investors as a result of the Noticee’s default. The persistent trading pattern of the Noticee, which was fraudulent and deceptive, affects the normal price discovery mechanism in the securities market. People who indulge in manipulative, fraudulent and deceptive transaction, or abet the carrying out of such transaction which are fraudulent and deceptive should be suitably penalized for such acts of omissions and commissions.
After taking into consideration the nature and gravity of the violations established in the preceding paragraphs and in exercise of the powers conferred upon me under Section 15-I of the SEBI Act, 1992 read with Rule 5 of the Inquiry Rules, 1995, I hereby impose a penalty of Rs. 5,00,000/- (Rupees Five Lakh Only) on the Noticee i.e., Mr. Pradeep Kumar Kayan, under Section 15HA of the SEBI Act, for indulging in execution of reversal trades in Stock Options with same entities on the same day, thereby creating artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE. I am of the view that the said penalty is commensurate with the lapse/omission on the part of the Noticee.
FULKL TEXT OF THE SEBI ORDER IS AS FOLLOWS:-
Securities and Exchange Broad of India
Adjudication Order No. Order/BD/VS/2020-21/9442
UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES) RULES, 1995
In respect of:
Pradeep Kumar Kayan [PAN AFOPK1284R]
6, Lyons Range, 28 Fortuna Chamber,
Calcutta, 700001
In the matter of Dealings in Illiquid Stock Options at BSE
BACKGROUND
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) observed large scale reversal of trades in Stock Options segment of Bombay Stock Exchange (hereinafter, referred to as ‘BSE’) leading to creation of artificial volume. Accordingly, SEBI conducted an investigation into the trading activities of certain entities in Illiquid Stock Options at BSE (hereinafter, referred to as “investigation”) for the period April 1, 2014 to September 30, 2015 (hereinafter referred to as “Investigation Period“).
2. It was observed that during the investigation period, total 2,91,643 trades comprising substantial 81.38% of all the trades executed in Stock Options Segment of BSE were found to be non-genuine trades. The aforesaid non-genuine trades resulted into creation of artificial volume to the tune of 826.21 Crore units or 54.68% of the total market volume in Stock Options segment of BSE during the investigation period.
3. It was observed that the said non- genuine trades were not restricted to any specific contract or between any specific set of entities. It was observed that Mr. Pradeep Kumar Kyan (hereinafter referred to as “Noticee”) was one of the various entities who were indulged in execution of non-genuine trades in Stock Options Segment of BSE during the investigation period. The following points narrate the dealings of the Noticee during the investigation period and the allegations against it for execution of non-genuine trades.
4. As regards to all the dealings of Noticee in the Stock Options segment of BSE during the Investigation Period, it was observed that the Noticee had traded in 34 unique contracts, from which it has allegedly executed non genuine trades in 34 contracts wherein it executed total 93 non-genuine trades, which resulted in artificial volume of total 121,34,836 units.
5. Summary of dealings of the Noticee in 34 Stock Options contracts in which the Noticee allegedly executed non genuine trades during the investigation period is as follows:
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