The BSE Brokers’ Forum has submitted a white paper on unauthorised trades in the securities market to market regulator, Securities and Exchange Board of India (Sebi).
The objective of the paper is to apprise the regulator of the difficulties faced by brokers - small and medium sized - while dealing with trading-related problems and to find a solution. The move is part of the forum’s efforts to create awareness about the menace of unauthorised trades, and to help investors take informed decisions while investing in the stock market.
“Though allegations of unauthorised trading will continue, certain measures, which require utilisation of stock exchange infrastructure, can substantially mitigate the menace, thereby helping in identifying genuine grievances without significantly impacting operations of the trading members,” said the forum in the paper.
In the past, brokers and investors faced many such instances where trades were treated as unauthorised due to many reasons. There have been cases where transactions took place at unrealistic prices or quantity due to punching errors by dealers or verbal miscommunication between clients and dealers. In a highly volatile market, trading members sometimes liquidate open positions of clients as part of the risk management systems. “If such incidents happen in a falling market, some trades are simply denied on flimsy grounds and can’t be proved due to a lack of telephonic recording,” said the forum.
While Sebi has taken some steps in the past to curb unauthorised trading, the concern among brokers is that they are not very effective. According to Sebi requirements, trading members should issue contract note to their clients containing details about securities bought or sold within one working day of execution of the trade. It is also required to issue daily margin statement containing details of collateral of the client with the trading member. They should issue quarterly statement of funds and securities or settlement and margins to clients.
In December 2009, Sebi came out with a new set of requirements according to which brokers should maintain documents in client registration kits, segregating them as mandatory and non-mandatory documents. Secondly, there should be a clear indication of exchanges or segments where clients intend to trade. An electronic contract note should be issued only after ensuring client authorisation to the email ID of the client.
The forum feels the onus of compliance of Sebi regulations is put on the trading members against whom the allegations of unauthorised trading are levelled. It suggested Sebi to bring in necessary safeguards in electronic communications of trading members instead of encouraging physical communication.
