SEBI Order in the matter of Algo Trades

  • Deal
  • November 23, 2022

JSA advised and successfully defended a leading broking firm (“Broking Firm”) in proceedings initiated by the Securities and Exchange Board of India (“SEBI”) in a matter involving algorithmic trading in the scrip of Bank of Baroda.

SEBI conducted an investigation into the trading activity of certain entities/ individuals in derivative contracts of Bank of Baroda. Pursuant to its investigation, SEBI issued a Show Cause Notice (“SCN”) to certain individuals / entities including the Broking Firm on the basis that a significant majority of the trades of the Broking Firm matched with the other noticees under the SCN, thereby attracting a charge of violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 (“PFUTP Regulations”).

While defending the charge, it was argued on behalf of the Broking Firm that the trades impugned by SEBI were in fact multi-legged algo-trades executed by the algo-trading software of the Broking Firm without any human intervention. It was further argued that the algo-trading software rapidly places thousands of orders on the basis of the data/feed received from the exchange and that these orders are placed within milliseconds of receiving the data from the stock exchange and are either executed immediately or cancelled immediately. It was also submitted that there was no connection established between the Broking Firm and the other noticees to show that the Broking Firm was party to any pre-determined plan/ scheme that could amount to violation of PFUTP Regulations.

SEBI accepted the submissions made and exonerated the Broking Firm of all charges. SEBI in its order dated October 21, 2022, has categorically observed that the trades were system driven multilegged algo trades; were placed at near theoretical prices; and did not result in price manipulation. Accordingly, SEBI held that violation of PFUTP Regulations could not be established. Further, SEBI also noted that there was no connection between the parties and that there was no material on record to establish the existence of a pre-determined plan. Accordingly, SEBI absolved the Broking Firm of all charges and disposed of the proceedings without imposition of any penalty/ adverse remarks.

JSA Dispute Team Comprised Partner – Vikram Raghani, Principal Associate – Pulkit Sukhramani, and Senior Associate – Vidhi Jhawar.