Anand Rathi Share And Stock Brokers ... vs Sebi

Order Reserved On: 07.05.2019 Date of Decision : 10.06.2019

Appeal No. 286 of 2017

Anand Rathi Share and Stock Brokers Limited 4th Floor, Silver Metropolis, Jai Coach Compound, Opposite Bimbisar Nagar, Goregaon (East), Mumbai ...Appellant

Versus

1.

National Stock Exchange of India Limited Exchange Plaza, Bandra Kurla Complex, Bandra (E), Mumbai- 400 051

2. Nirpan Securities Pvt. Ltd.

301, 308, 3rd Floor, Bhagwati House, A-19, Veera Desai Road, Andheri West Mumbai- 400 058

3. J M Global Equities Pvt. Ltd.

Office No: 208/208A, Second Floor, Raghuleela Mega Mall, Off S.V. Road, Kandivali (West), Mumbai- 400 067

4. Transglobal Securities Ltd.

3 Ashok Chambers, Bharuch Street, Masjid Bandar (E), Mumbai- 400 009

5. IKM Investors Pvt. Ltd.

149-152, 1st Floor, Edmonton Mall, Bristol Hotel, M. G. Road, Gurgaon- 122 022 2

6. Gee Bee Securities Pvt. Ltd.

5 Clive Row, 2nd Floor, Room No. 42P, Sarvamangala Building, Kolkata- 700 001

7. Haven Financial Services Pvt. Ltd.

Room No. 306-307, Sagar Avenue, Opp. Shoppers Stop, S.V. Road, Andheri (W), Mumbai- 400 058

8. Inventure Growth & Securities Ltd.

Viraj Towers, 201, 2nd Floor, Near Landmark, Western Express Highway, Andheri (East), Mumbai- 400 069

9. Todi Securities Pvt. Ltd.

1st Floor, Room No. 12, Martin Burn House, 1 R. N. Mukherjee Road, Kolkata- 700 001

10. Bhaijee Portfolio Ltd.

3rd Floor, Building No. 14, Central Market, Phase 1, Ashok Vihar, New Delhi- 110 052

11. Lohia Securities Ltd.

4 Brabourne Road, 5th Floor, Passport Building, Kolkota- 700 001 ...Respondents

Mr. P. N. Modi, Senior Advocate with Ms. Kalpana Desai, Ms. Aashni Dalal and Ms. Stuti Shah, Advocates i/b J. Sagar & Associates for the Appellant.

Mr. Venkatesh Dhond, Senior Advocate with Mr. Rashid Boatwalla and Mr. Rahul Jain, Advocates i/b Manilal Kher Ambalal & Co for Respondent No. 1

Ms. Poonam Gadkari, Advocate i/b Juris Matrix Partners LLP for Respondent No. 4 3

Mr. Harsh Kesharia, Advocate with Mr. Vikas Bengani and Mr. Saurabh Bachhawat, Advocates i/b Mr. S. K. Jain, PCS for Respondent No. 5.

Mr. Ravikumar Varanasi, Advocate with Mr. Deepak Rane, Advocate for Respondent No. 7 None for Respondent Nos. 2, 3, 6, 8, 9, 10 & 11

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M. T. Joshi, Judicial Member

Per: Dr. C.K.G. Nair

1. This appeal is filed challenging the order of the

Independent Oversight Committee ("Oversight Committee" for

short) of the National Stock Exchange of India Limited ("NSE"

for short) dated July 07, 2017. By the said order the Oversight

Committee rejected the request of the appellant for annulment

of certain trades executed on September 26, 2013 in NIFTY

Options Contract.

2. The relevant undisputed facts in the matter are the

following:-

a) On September 26, 2013 at around 3:20 pm, the

Ahmedabad Branch office of the appellant

decided to square-off and close existing intra-

day open positions in NIFTY Options of five of

its clients. Since these Options Contracts were 4

expiring on this day, approval of the clients

was also sought and obtained for squaring-off

their open position before closure of the trade

hours since squaring off attracts lower

Securities Transaction Tax ("STT").

b) The dealers prepared batch files and placed

orders around 3:26 pm, opting for the "market

rate" and not the "limit rate". This would mean

that these batch orders would be executed at

the prevailing market rates in terms of the

price-time order matching of the trading

system.

c) The total quantity of sell order was four

batches each of NIFTY Options for 5700 call

options and 6000 put options with a total

quantity of 305000 units each as given at Pg.

179 of Appeal Memorandum. While the first

batch got traded at market prices (near the last

traded price), the subsequent trades resulted in

substantially low prices resulting in a total loss

of around ` 4.71 crores. For instance, for the

5700 strike prices the market price was around 5

` 180+ when the orders were placed whereas

orders got executed at different rates between

` 178.30 and ` 21. Similarly, in the case of

6000 strike price the market was around ` 118

whereas, the orders got executed between

` 118.05 going down to a price of ` 1.30.

d) The appellant faxed a trade cancellation request

to the NSE in the evening of September 26,

2013 citing "inadvertent punching error" as the

reason for the request. On the same day vide

an Email at 5:53 pm, the appellant submitted a

trade cancellation request for "erroneous trades

executed inadvertently" in the prescribed

format. Further, on the same day the appellant

filed a criminal complaint with the Crime

Branch of Ahmedabad Police stating "fraud

and criminal breach of trust by employees of

the appellant" (3 dealers as well as head of the

Regional Officer, (RO), HNI division of

Regional Office of Ahmedabad). Ahmedabad

Police asked NSE to enquire into the matter. 6

e) On September 27, 2013 at 8:51 am the

appellant sent an Email to NSE requesting to

withhold the payouts to the counter party

brokers as the "appellants are initiating further

action which will be intimated to you

(Respondent) before today afternoon".

f) On September 27, 2013 the appellant sent a

detailed application to the Respondent (NSE)

requesting for annulment of the trade carried

out on the previous day. In this application it is

contended by the appellant that the orders were

placed at market rate due to inadvertent

negligence of the dealer traders and was not

based on the instructions given by the clients.

Further, it was claimed that since the NIFTY

was not volatile the market price should have

been nearer to the last traded price. However,

extremely low price at which some of the

trades got executed were clearly against the

various circulars issued by the Respondent

(NSE) and NSE should investigate whether

there was any fraudulent activity involved in 7

the matter. Accordingly, the appellant sought

annulment of the trades and sought further

hearing in the matter and requested that in the

interim not to make payout to the counter party

brokers. It was also submitted that as per the

bye-laws of the Stock Exchange as well as its

Clearing Corporation annulment of trade is

possible on account of factors as in the case of

the trades of the appellant got executed on

September 26, 2013.

g) NSE after forwarding the representation of the

counter parties to the appellant and after

hearing the parties including the counter parties

rejected the appellant's application for

annulment on May 06, 2014.

h) The appellant filed an Appeal No. 297 of 2014

against this order in this Tribunal.

i) On August 26, 2014 this Tribunal passed the

judgement in the matter of M/s. Emkay Global

Financial Services Limited V/s The National

Stock Exchange of India Limited and Others 8

(Appeal No. 64 of 2013 decided on August 26,

2014) ("Emkay" for short).

j) On November 16, 2016 this Tribunal remanded

the matter to NSE to pass a fresh order in view

of the judgement in the matter of Emkay

(Supra) as sought by the counsel for NSE.

k) On July 07, 2017 the order impugned in this

appeal is passed by the NSE Committee.

3. Shri P. N. Modi the learned senior counsel appearing on

behalf of the appellant reiterated the above stated factual

positions and further contended that various Circulars issued by

the Respondent (NSE) at different points of time had advised

the market participants not to place orders in the NIFTY

Options Segment at unrealistic prices/ prices which are far away

from normal market price/ theoretical price either on account of

proprietary trade or on account of their clients. Particular

references were made to such Circulars issued by the Futures &

Options ("F&O") Segment Division of NSE, dated January 20,

2004, February 22, 2005 the consolidated Circular dated

November 25, 2008; the Circular by the investigation 9

department dated March 23, 2007 and Circulars dated

November 10, 2010, April 24, 2012 and August 14, 2013.

Based on the content of these Circulars it was canvassed that in

the present case when the market price is around ` 118+ the

appellant cannot expect the market price to go down to a level

of ` 1.30 when such instructions issued by the Exchange were

in operation. It was further contended that as per these

Circulars appropriate action should have been taken against the

counter parties (brokers) who placed orders in the trading

system at abysmally low prices far away from the market price /

theoretical price and that too mainly from their proprietary

accounts.

4. It was further submitted that the appellant was ready to

appreciate the fact that some decline in price is possible and,

therefore told NSE when the matter was heard that only trades

executed below 50% of the market price need to be annulled,

though this would result in some loss to the appellant. Further

for such action by certain brokers in placing orders at low prices

far away from market price exemplary action should be taken to

bring discipline in the market and to promote market integrity. 10

5. The learned senior counsel for the appellant also took

us through the trade logs of the NIFTY Options Contracts

traded by the appellant in the few minutes before closure of the

trading hours on September 26, 2013 and showed us how price

moved drastically in split seconds between 3 digit and single

digit ranges and submitted that only the best 5 prices quoted are

shown on the trading screen and the appellant would not know

what is beneath these best prices shown on the screen.

Therefore, the appellant assumed that in the light of the

instructions to brokers not to place orders at far away prices

failing which disciplinary action would be initiated, prices too

far away from what is shown on the trading screen are not in the

system. Though, the appellant initially requested cancellation

of all impugned trades, later on it was brought down to trades

matched at less than 50% of the last traded price / market price

which was further restricted to the trades in respect of the 10

respondents in this appeal. Accordingly, it was submitted, that

for the genuine mistake of the dealer traders of the appellant by

placing a market order instead of a limit order, the bye-laws of

the Exchange and Clearing Corporation allow annulment of

trade and the present matter is a fit case for invoking the bye-

laws for annulling the trades. The appellant also submitted that 11

out of compulsion the appellant has already settled the matter

with 2 respondents (i.e. Respondent Nos. 2 & 3).

6. The learned senior counsel for the appellant heavily

relied on the decision of this Tribunal in the matter of Emkay

(Supra) and submitted that following the majority order therein

impugned trades may be annulled and exemplary action taken

against the respondent counter party brokers.

7. Learned senior counsel Shri V. Dhond appearing on

behalf of Respondent No. 1 (NSE) submitted that as per bye-law

5 of Chapter VII the Exchange (NSE) the Exchange may by a

notice annul the deal(s) on an application by a trading member

if the relevant authority is satisfied, after hearing the other

party/parties to the deal(s), that the deal(s) is/ are fit for

annulment on account of fraud or willful misrepresentation or

material mistake in the trade. Thus, there are only these three

conditions under which the Exchange may annul a deal. Even

under these conditions it is not mandatory to annul the trade. In

any case, in the present matter none of these conditions is

satisfied. It is a clear case of three dealers and their supervisor

placing the orders in the last few minutes of the closing hours of

trade on the last trading day of the contracts on September 26, 12

2013. These contracts had to be closed on that day since it was

the last trading day. Approval from the clients for squaring off

was taken around 3:20 pm and orders had to be executed before

3:30 pm, the closing time. Therefore, the submission that by

mistake the traders/ dealers of the appellant entered the market

price option instead of the limit price option is without

substance, because, the appellant being an experienced trader in

the securities market was fully aware that a large quantity of

NIFTY Options which had to be compulsorily squared off that

day itself cannot be done by fixing a limit price option. So the

choice of the market price option was done deliberately so that

the entire quantity would be squared off in that limited four

minutes of the remaining trading time, sine the first batch of

orders of 20000 (10000 each of 5700 call options and 6000 put

options) was placed at 3:26 pm.

8. It was further contended that the Circulars relied on by

the appellant are all belonging to an earlier regime. The F&O

consolidated Circular dated April 24, 2012 issued by the

Respondent (NSE) to all its members clearly states the base

price and operating ranges applicable to the contracts and how

the theoretical price of such contracts are arrived at by using the

Black-Scholes model. It is a complex pricing model for options 13

pricing and the minimum and maximum prices are decided by

this model rather than decided by any manual exercise. Though,

subsequently by a Circular dated April 11, 2014 this range has

been narrowed and circuit filter introduced, at the relevant time

of September 2013 there was no such specification and the

range was automatically decided by the said Black-Scholes

model. The appellant, like other brokers, was fully aware of

this. The submission that they could see only the five best

prices available on the screen, though is a fact, the appellant was

fully aware that the price could potentially go down up to ` 0.05

as per the Black-Scholes based formula.

9. He further submitted that the market price was punched

erroneously by the trader-dealers, instead of the limit price, does

not stand to scrutiny because of the fact that the appellant filed a

police complaint on the same evening alleging fraud and

manipulation by his employees in the Ahmedabad Branch

Office. Further in another submission the appellant also

attributed negligence on the part of the traders in opting for the

market price instead of the limit price option. Therefore, there

is no consistency in the submissions made by the appellant as to

why they opted for the market price option and that too in the

last few minutes of the market when they had to sell a large 14

quantity of NIFTY Options. Every trader would know that on

the last trading day and that too in the closing minutes if large

quantities are to be squared off the price would fall and,

therefore, being an experienced trader the appellant was

conscious of multiple layers of prices based on the Black-

Scholes model lurking below the five best prices shown on the

trading screen. The learned senior counsel for Respondent

(NSE) emphasised that the prices of the options premium at the

relevant time were decided by the Black-Scholes formula only.

There was no additional constraint except some advisory to the

participants to trade at prices nearer to the market price. Being

an experienced trader, particularly putting through large

quantities of contracts, appellant should have exercised the limit

price option in case of wanting to avoid far away prices and in

the fact of the present matter bye-laws of the Exchange does not

allow annulment of such trades.

10. Learned counsel appearing for other Respondent Nos.

4, 5 and 7 also adopted the submissions made by the learned

counsel for Respondent No. 1. In addition Respondent No. 7

submitted that it did only client transactions, which was though

disputed by the appellant stating that the client is a related party.

Respondent No. 5 contended that they did trading through 15

'Algo' trading which responded to trades already on the screen

and their trades did not match at the lowest price. Respondent

No. 4 submitted that the orders placed by it were within the

price range allowed by the system and those prices were not

unrealistic and prices of the Options fall on the last traded day

which is the expiry day and in fact as the Options near expiry

the option price starts diminishing. Respondent No. 10, though

did not appear on the day of final hearing, gave their written

views on the above lines.

11. Before proceeding further, bye-law 5 of Chapter VII of

the bye-laws of NSE is reproduced below for convenience:-

"Inviolability of Trade 5 (a) All the dealings in securities on the Exchange made subject to the Bye Laws, Rules and Regulations of the Exchange shall be in-violable and shall be cleared and settled in accordance with the Bye Laws, Rules and Regulations of the Exchange. However, the Exchange may by a notice annul the deal(s) on an application by a Trading Member in that behalf, if the relevant authority is satisfied after hearing the other party/parties to the deal(s) that the deal(s) is/are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade.

16 (b) Notwithstanding anything contained in clause (a) above, the Exchange may, to protect the interest of investors in securities and for proper regulation of the securities market, suo motu annul deal(s) at any time if the relevant authority is satisfied for reasons to be recorded in writing that such deal(s) is/are vitiated by fraud, material mistake, misrepresentation or market or price manipulation and the like.

(c) Any annulment made pursuant to clauses

(a) and (b) above, shall be final and binding upon the parties to trade(s). In such an event, the trading member shall be entitled to cancel the relevant contracts with its constituents."

A reading of the above bye-law makes it clear that annulment of

trade is resorted to only in rare cases particularly when fraud,

willful misrepresentation or material mistake in the trade

happens. The submission that error in punching market price

instead of the limit price option in the instant matter is a

material mistake cannot be accepted because it is evident from

record that three different dealers and their supervisor of the

Ahmedabad Branch Office were involved in executing the

impugned trades and all of them could not have made the same

"mistake" or "error" in punching. The subsequent steps taken by 17

the appellant and the reasons given to the Police also indicate

that the appellant is not consistent in its submissions.

Moreover, it is an undisputed fact that huge volumes of NIFTY

Options belonging to the clients had to be squared off by the

appellant in the last few minutes before the expiry of the

Contracts on September 26, 2013. All these clearly prove that it

was not an unintended material mistake or error on the part of

the appellant.

12. From the various cited Circulars, particularly Circular

dated April 24, 2012, it was very clear that the price range was

decided based on the Black-Scholes model where, we are told

that the price applicable was in the range of ` 0.05 to ` 570.10

for NIFTY put Options ` 6000 and between ` 0.05 to ` 687.45

for NIFTY call Options ` 5700 at the relevant time. This

Tribunal does not propose to judge whether such a range is

appropriate or not. However, if that range is what the

methodology brings out and if the market had accepted that

methodology at the relevant time without challenging the same

before an appropriate forum, the same has to be accepted as the

appropriate range. All trading members who were doing the

trades at the relevant time, therefore, were expected to be aware

of the possibility of prices moving within these ranges. We are 18

also told that along with the best five prices shown on the

trading screen the quantities on offer are also available against

those best prices. So traders wanting to trade in large quantities

had to be conscious of the possibility of matching their trades at

prices substantially varying from the five best prices shown on

the screen. It is not for this Tribunal to get into the issue of how

prices can vary suddenly from ` 100 to ` 10 or even ` 1 within a

fraction of a second except restating that the automated trading

system of a highly liquid options market is so complex and fast

changes in prices based on various factors are expected in

milliseconds or even microseconds. In a liquid market, the

market moves even within the time when an order is placed and

a huge order itself will move prices are known to all

experienced traders like the appellant.

13. Reliance placed by the appellant in the order of this

Tribunal in Emkay (Supra) is distinguishable since admittedly

the NIFTY Index itself moved substantially in the matter of

Emkay while in the matter before us the NIFTY did not move at

all, a point emphasised by the appellant. Moreover, in Emkay

(Supra) it was evident from the facts that the counter parties

therein had entered orders violating position limit and margin

rules. Coupled with this fact and the abrupt movement in the 19

NIFTY Index and consequently some traders taking extra

advantage of the movement in the NIFTY led to a SEBI

investigation. In the present matter, on the contrary, without any

movement in NIFTY, because of orders placed at prices far

away from the last traded price contrary to the expectations of

the appellant, and because of the large quantity of the order

placed by the appellant in the last four minutes of trading part of

his sell order got matched at low prices as well.

14. Though, certain cautionary Circulars had been issued

by the respondent Exchange (NSE) over a period of time asking

trading members not to place orders at far away prices from the

market price/ intrinsic value, the pricing methodology prevalent

at that time was only as per the formula set by the Black-

Scholes methodology. This was known to all the market

participants in the F&O Segment. There was no circuit filters in

existence. Therefore, the only remedy available to trading

members to limit loss while placing orders was to accept the

limit order route rather than the market order route. It is an

admitted fact that the traders of the appellant did not use the

limit order route. It is also an admitted fact that a large quantity

of NIFTY Options were placed for sell in the last few minutes

of the closure of the trading day which was also the expiry day 20

of the contract. It is also a generally known fact that on the

expiry day of a contract prices tend to fall and, therefore,

executing large orders will invariably gravitate towards lower

prices.

15. We find no merit in the submission of the appellant that

the traders of the appellant committed an unintentional mistake

in placing a market rather than limit order since all three traders

and their supervisor cannot make the same mistake. Therefore,

given the facts and circumstances it was a conscious decision

taken by the appellant in squaring off the open position of its

clients on the last trading day of the contract and that too in the

last few minutes before closure of trading. Having taken such a

decision the only valid contention of the appellant remains that

of expectations regarding the depth of the market and at what

level the prices would be moving. Here the price range was set

by the Black-Scholes methodology and in the range of ` 0.05 to

` 570.10 for NIFTY put Options ` 6000 and between ` 0.05 to

` 687.45 for NIFTY call Options ` 5700. When a methodology

was known to the market participants and as per the

methodology price range was set we cannot interfere with such

a system in arbitrarily deciding what should be far away prices

from the intrinsic value. There were 101 counter parties who all 21

were aware of the applicable price ranges and placed orders at

different prices.

16. We also note that bye-law 5 of the Exchange NSE is

essentially about upholding the sanctity of trade since it is on

"inviolability of trade". Accordingly, we agree with the

contention that annulment of trade should be resorted to only in

extreme cases as specified under this bye-law. Considering all

the factors in the present matter, we do not agree with the

contention of the appellant that it was a material mistake from

the side of the trader / dealers of the appellant and, therefore, we

do not agree that the impugned trades are liable to be annulled.

17. However, we note that the Exchange was not very clear

when they issued advisories to the trading members that they

should not be placing orders at far away prices. It is also noted

that such advisories were issued even on August 14, 2013.

Similarly, the Circulars dated November 16, 2010 and April 24,

2012, the issue of price range and flexing of price range from

` 1 to ` 3 etc. is ambiguous. Regulatory instruction, particularly

relating to trading and settlement matters should be clear and

unambiguous and also clearly stating the consequences of

violations. Such violations, if any, also need to be dealt with 22

appropriately. However, we refrain from issuing any directions

to NSE in this regard at this time since by the Circular dated

April 11, 2014 greater clarity and certainty have been brought in

clearly stating the range within which only trading is possible in

the options segment as well.

18. In the result, appeal is dismissed with no order on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 10.06.2019 Prepared & Compared By: PK