Sunday, May 24, 2015

Synchronised Trading: In Sync With the Law? – Part 1

[The following guest post is contributed by Kanwardeep Singh Kapany (5th B.S.L.LL.B) and Mitravinda Chunduru (4th B.S.L.LL.B.), both students of ILS Law College, Pune]


The on-line trading system on the stock exchange is a blind trading system, which maintains complete anonymity of the persons trading on it. It does not permit the buyers and sellers to have any interaction between them except through the trading system. Stock brokers execute the trades, buy or sell, for their clients. A buy order placed on the system matches with a sell order and a trade comes to be executed and this matching is done by the system on a price time priority basis.[1] Despite the anonymity of the system, it has been alleged before the Securities & Exchange Board of India (“SEBI”), the Securities Appellate Tribunal (“SAT”) and other competent original and appellate jurisdiction bearing forums (collectively called “Competent Forums”) that market players and intermediaries, either individuals or corporate entities, have thwarted the checks and balances innate in the system by executing manipulative trades (“Alleged Contravener”) which in turn aids market rigging.

This post deals with one such modus operandi called as a ‘synchronised trade’, which can transpire only in the secondary market and not at all in the primary market. Synchronised trading, in certain situations, is found to violate and therefore is punishable under the Securities & Exchange Board of India Act, 1992[2] (“SEBI Act”), the Securities & Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2005[3] (“PFUTP Regulations”), as well as the Securities and Exchange Board of India (Stock Brokers and Sub - Brokers) Regulations, 1992[4] (“Broker Regulations”) (collectively called the “Act & Regulations”). This treatment being meted out to synchronised trading is in line with the single pointed objective of the SEBI Act, which is to protect the interests of investors in securities and to promote the development of securities market by regulating it. The said objective is imbibed by both PFUTP Regulations as well as Broker Regulations as the former prohibits manipulative, fraudulent and unfair trade practices and the latter mandates brokers to maintain high standards of integrity, promptitude, fairness and to exercise due skill, care and diligence in the conduct of its business.[5]


A synchronised trade is one wherein buy and sell orders are placed simultaneously for the same amount and at the same price[6] (“Legal Synchronisation”). Synchronised trades per se are not illegal and they have been sanctified by SEBI subject to certain conditions.[7] However, synchronised trades can be executed with a view to manipulate the price or the volumes of the traded scrip or both or with some ulterior purpose (“Illegal Synchronisation”), therefore violating provisions of the aforementioned Act & Regulations. Whether an Illegal Synchronisation has been undertaken will have to be gathered from the intention of the parties[8] for which there would seldom be any direct or foolproof evidence. The reason for this is that the intention of the parties concerned would be within their special knowledge.


The intention of the parties to indulge in Illegal Synchronisation manifests in the form of certain overt acts. One has to appreciate that these factors, as enlisted hereinafter, in the very nature of things cannot be exhaustive, as any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.

Connection Inter se Clients / Connection Inte rse Brokers / Connection Inter se Clients And Brokers

The fact that certain clients are connected to each other (“Connected Clients”) can be established by pointing out the presence of certain circumstances. Such circumstances include:

(a) the existence of a personal relationship, either by blood or otherwise, between or amongst clients;

(b) one person arranging flow of funds[9] in favour of another person without there being any legal obligation to do the same;

(c) various companies operating from a common address;[10]

(d) relationship shared between or amongst companies, such as the kind shared between or amongst associate companies;[11] and

(e) when various corporate or non corporate bodies have the same individual holding such a position which empowers the position holder to have an authoritative say on matters which can aid in the execution of Illegal Synchronisation.[12]

One such position is that of a director which is held by an individual.[13] An individual can be a director on the board of various companies (“Common Director”).[14] However, merely being a Common Director is not sufficient to draw the conclusion that certain companies are Connected Clients.[15] Therefore, necessarily aid of other attending circumstances is required. These attending circumstances include inability of such companies to present their case in the absence of such Common Director when called upon to do so by a Competent Forum and or testimony of witnesses which goes to show that the Common Director was the one who would give instructions to brokers, on behalf of companies, for execution of trades which are subsequently being alleged to have contravened the Act & Regulations.

The connection between or amongst brokers (“Connected Brokers”) can be established by applying the same principles with which Connected Clients are identified. Additionally, Connected Brokers can be identified, when brokers constituting Connected Brokers, either individually or in concert, are the only common thread running through various trades which have taken place between or amongst clients constituting Connected Clients,[16] such as being the major counter party broker with respect to orders placed by a broker or brokers belonging to the same group of Connected Brokers.[17]

The connection between Connected Brokers and Connected Clients can be established by demonstrating that trades on behalf of Connected Clients were executed by Connected Brokers and both the party and counter party with respect to the trades in question happen to be those clients and brokers who / which are constituents of the Connected Clients and Connected Brokers. Further, there could also be a connection / relation between brokers and clients belonging to the opposite sides of a trade. The principles with respect to identifying Connected Clients / Connected Brokers, as provided for hereinabove, can be applied similarly.

There are two propositions of law common to all the aforementioned connections. Firstly, Competent Forums, for the purpose of concluding presence or absence of the aforementioned connections, lift the corporate veil,[18] if circumstances so merit.[19] Secondly, once any or all of the aforementioned connections are established, then on noticing matching of such trades day after day and trade after trade, one can safely infer that the matching is happening not by the trading system but by manipulation.[20]          

Price, Quantity And Time Test

Price, Quantity and Time test (“PQT Test”) is used to identify wash trades,[21] which lead to Illegal Synchronisation. These are trades between connected or related parties wherein sale and purchase of securities are matched with each other in terms of price, quantity and time. The said test becomes reliable if the time difference between buy and sell orders is either negligible or of a few seconds only.[22] This is especially so when the shares of the company are highly liquid at the time of trades, then PQT matching will exceptionally take place in the absence of any specific understanding / arrangement between the parties. Similarly, in a situation of high volatility, wherein prices of the shares can change dramatically over a short period in either direction, it is extremely improbable that the client could be in a position to give a price range which would match only with a particular counter party broker at a particular quantity.[23] Higher the rate of recurrence of such matching of trades amongst same set of Connected Clients through Connected Brokers on either side of the trade, lesser the chances of it being a mere coincidence and greater the inevitability of a pre planned device.[24]

No Change In Beneficial Ownership

A beneficial owner is a natural person or persons who ultimately owns, controls or influences a client and or persons on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.[25] When on the execution of a trade there is no change in the beneficial ownership, it is called a self-trade. A self-trade occurs when one person buys and sells shares from himself. Such trades are frowned upon as they are fictitious, and meant to operate as a device to inflate, depress, or cause fluctuations in the market price of securities.[26]

Large Trading Concentration In A Scrip

The expression ‘concentration’ in the realm of the Act & Regulations means one’s share in the execution of trades with respect to a particular scrip or various scrips. For Illegal Synchronisation to be successfully carried out, the Alleged Contravener has to be in a position which enables one to drive up, deflate or cause sudden rise and fall in the market price of the scrips listed on the stock exchange.[27] The said position of influence cannot be reached by market players and or intermediaries by executing miniscule trades when compared to the total trades executed with respect to the said scrip.

Substantial Unwinding Of Long Positions, Short Sale Positions

Taking a long position in a scrip means the buying of a security to hold onto the same as the owner of scrip has the expectation that the said asset will rise in value.[28] Short Selling means selling of a stock that the seller does not own at the time of trade[29] by complying with the conditions laid down by SEBI in this regard.[30] Unwinding refers to undo or to go back on a previous action or conduct. Unwinding of long positions refers to the owner of scrips deciding not to hold onto the scrip or to hold for a time period which is lesser than the one initially thought. The said action of unwinding long positions and or short selling is not per se illegal until and unless it can be demonstrated that the aforesaid transactions, were carried out with the intention to carry out Illegal Synchronisation[31] such as artificially putting sale pressure on the scrip to cause a downfall in the price of the scrip.

Lack Of Business Prudence

The expression ‘business’ refers to a commercial enterprise carried on for profit.[32] The expression prudence refers to ‘being circumspect or judicious in one’s dealings.[33]  Therefore business and prudence read together means such behavior that will exhibit caution while conducting business. Therefore, intention to undertake Illegal Synchronisation can be ascribed to Alleged Contraveners when they are found indulging in acts such as heavily buying a scrip which has weak fundamentals[34] or is otherwise an illiquid scrip[35] or placing of buy orders at incremental prices i.e. at prices higher than previous day’s closing prices[36]. In order to establish lack of business prudence with respect to trades being undertaken, comparison can be drawn with the price movement of certain scrips of certain companies. The said companies being used as comparables should be similarly placed inter alia in terms of size.[37]

Violation Of Code Of Conduct For Stock Brokers

A stock broker is expected to carry out execution of trades as per the instructions of the client. While implementing the said instructions, the broker has to conduct his business in compliance with the Broker Regulations. The said regulations require the broker to maintain integrity, exercise due skill and care, not indulge in manipulative, fraudulent or deceptive transactions, not undertake malpractices such as creating false market or contravening statutory requirements as specified in Broker Regulations. The said checks on the conduct of a broker are put in place to prevent a situation from arising wherein a market intermediary itself gets embroiled in contravening the Act & Regulations by becoming a party to the mischief of Illegal Synchronisation.

[To be continued in Part 2, which will deal with Defences and then conclude]

- Kanwardeep Singh Kapany & Mitravinda Chunduru

[1] Trading System in NSE, available at: (visited on February 18, 2015); Trading and Settlement in BSE, available at: (visited on February 18, 2015).
[2] Section 15-HA.
[3] Regulations 3 & 4.
[4] Schedule II clause A.
[5] Broker Regulations, schedule II.
[6] Ajmera Associates Limited v. SEBI, MANU/SB/0044/2010.
[7] SEBI Circular on Negotiated Deals, SMDRP/POLICY/CIR-32/99, (September 14, 1999).
[8] Grishma Securities Private Limited and Others v. SEBI, MANU/SB/0060/2013.
[9] SEBI v. Dresdner Kleinwort Benson Securities (India) Ltd., MANU/SB/0087/2004.
[10] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[11] SEBI v. Accord Capital Markets Limited, MANU/SB/0136/2007.
[12] SEBI v. Krishvi Securities Private Limited, WTM/RKA/IVD/ID-4/ 26/2013.
[13] The Companies Act, 2013, section 149(1).
[14] The Companies Act, 2013, section 165.
[15] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[16] SEBI v. Krishvi Securities Private Limited, WTM/RKA/IVD/ID-4/ 26/2013.
[17] SEBI v. Krishvi Securities Private Limited, WTM/RKA/IVD/ID-4/ 26/2013.
[18] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[19] Delhi Development Authority v. Skipper Construction Company Private Limited, AIR 1996 SC 2005.
[20] Sebi v. A Nitin Capital Services Limited, MANU/SB/0101/2007.
[21] Nirmal Bang Securities Private Limited v. SEBI, MANU/SB/0206/2003.
[22] SEBI v. Biyani Securities Private Limited and Shri Harish Biyani, MANU/SB/0023/2005.
[23] SEBI v. Accord Capital Markets Limited, MANU/SB/0136/2007.
[24] Angel Broking Private Limited v. SEBI, MANU/SB/0058/2013.
[25] SEBI Master Circular on Anti Money Laundering Standards / Combating the Financing of Terrorism / Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder, available at: (visited on February 19, 2015).
[26] SEBI v. Pravin V Shah Stock Broking Private Limited, MANU/SB/0140/2007.
[27] In Re: GHCL Ltd., MANU/SB/0090/2007.
[28] SEBI v. First Global Stock Broking Private Limited and Vrudhi Confinvest (I) Private Limited, MANU/SB/0122/2002.
[29] FAQ’s on Secondary Market, available at: (Last Modified February 28, 2009), FAQ no. 37.
[30] Securities Lending Scheme, 1997.
[31] SEBI v. First Global Stock Broking Private Limited and Vrudhi Confinvest (I) Private Limited, MANU/SB/0122/2002.
[32] Bryan A garner (ed.), Black’s Law Dictionary, 211 (8th edition).
[33] Bryan A garner (ed.), Black’s Law Dictionary, 211 (8th edition), page 1236.
[34] In Re: Sawaca Business Machines Limited; SEBI v. Rajesh N. Jhaveri, MANU/SB/0302/2004.  
[35] In Re: Orient Trade Link Limited; In Re: M/s MLD Securities Private Limited, MANU/SB/0082/2012.
[36] JHP Securities Private Limited v. SEBI, MANU/SB/0069/2014.
[37] Ketan Parekh v. SEBI, MANU/SB/0229/2006.


vswami said...

Sporadic (to provoke useful thoughts)
“Synchronised Trading: In Sync With the Law?”

At best, a good academic study !

On the first blush,however,the discussion, as read and understood, prima facie, provides no clue or ways and means to find any satisfactory answer to the poser, or any solution to the varying kinds of attendant, nay unavoidable irregularities and illegalities the so called “synchronised trading” is potent with; notwithstanding the numerous regulatory measures conceived of , changed from time to time, and being experimented to keep those under ‘control’,- though not capable of being eradicated. Personally, one thinks, in the very nature of things, the mechanism of “Synchronised Trading” is basically ill conceived and faulty ; if so, to expect or aspire, with the objective of bringing/bending it , howsoever hardly attempted, to be “In Sync With the Law”, is well nigh an impossible /impractical proposition, -a nonstarter.
Further, what “the law” under reference refers to is far from being clear; rather does not seem to have or even amenable to have a clear cut and well defined meaning, to begin with. To put it differently, given the mindset of individuals/ groups active in the bourse, with the sole aim of making speculative gains, it is incomprehensible that there could be any set of ‘rules’ laid down so as to accomplish the underlying objective of ‘disciplining’ them, even remotely.
Still, the ‘trading’ has to compulsively go on!

Kanwardeep Kapany & Mitravinda Chunduru said...

Dear vswami sir,

Thank you very much for your comment.

The answer to the poser, i.e. whether synchronised trading can be in sync with law has been answered in express words in the post. The answer has been provided by classifying synchronised trading into "Legal Synchronisation" & "Illegal Synchronisation". In other words synchronised trading can be both legal and illegal, the distinction depending upon the attendant circumstances which have been dealt with in the post.

Therefore, it will not be nigh or impossible/impractical to submit that on certain occasions synchronised trading can very well be in sync with the law.

Karthik Seshadri said...

I had occasion to conduct an arbitration before a Rtd. Sup Ct Judge on this issue. In that case the Pledgor of shares fearing action from a Pledgee in disposing off the shares approached a Civil Court and got an injunctive relief from sale. Pledgee upon getting notice of the same, colluded with the broker and got the pledged shares sold in a synchronised deal ... and feigned ignorance of the injunction order. The parties agreed for arbitration and in the arbitration we established that the sale was mala fide and a synchronised one to defeat the Pledgor's rights. Arbitrator awarded a very handsome compensation after concluding that the sale was really an orchastrated one.