Order in respect of Crosseas Capital Services Private Limited in the matter of Bharatiya Global Infomedia Limited

ORDER Under section 15-I (3) read with section 19 of the Securities and Exchange Board of India Act, 1992 In respect of Crosseas Capital Services Private Limited – in the matter of Bharatiya Global Infomedia Limited

Dates of hearing : July 17, 2014 and July 24, 2014 Appearance: For Crosseas Capital Services Private Limited: (1) Mr. Rajesh Baheti (Managing Director) and (2) Mr. Manish Garg (Compliance Officer) on July 17, 2014. (1) Mr. Ravi Kumar Varanasi, Advocate, (2) Mr. Deepak Rane, Advocate, (3) Mr. Rajesh Baheti and (4) Mr. Manish Garg on July 24, 2014. For the Securities and Exchange Board of India: 1. Mr. B. Rajendran, General Manager 2. Ms. Anitha Anoop, Deputy General Manager 3. Mr. C. Sugadev, Assistant General Manager 4. Mr. T. Vinay Rajneesh, Assistant General Manager

1. The Securities and Exchange Board of India (hereinafter referred to as "SEBI") had conducted an investigation into the affairs pertaining to the Initial Public Offer ("IPO") of Bharatiya Global Infomedia Limited ("the Company" or "BGIL") and the trading in the scrip on the stock exchanges on the listing day i.e., July 28, 2011. In the investigation, SEBI inter alia noticed that Crosseas Capital Services Private Limited (hereinafter referred to as "the noticee"), a stock broker registered with SEBI and a trading member of both the National Stock Exchange of India Limited ("NSE") and the Bombay Stock Exchange Limited ("BSE"), had – (a) indulged in self trades (where the noticee was on both the sides of a trade i.e., buyer as well as seller) in the scrip for a total quantity of 9,20,298 shares on the BSE and NSE; and (b) executed 16 self trades on BSE and 1375 self trades on NSE from the same terminal for a total quantity of 81,436 shares in the scrip.

The nature of the above trades of the noticee were alleged to be artificial and the noticee was alleged to have contravened the provisions of section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 ("the SEBI Act") read with regulations 3, 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ("the PFUTP Regulations") and Clause A of the Code of Conduct for Stock Brokers under Schedule II of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 ("the Stock Broker Regulations) read with regulation 7 thereof.

2. In view of such alleged violations, the case was referred for Adjudication Proceedings under Chapter VIA of the SEBI Act. The Adjudicating Officer, who conducted the inquiry, observed, vide Adjudication Order dated April 30, 2014 ("the Adjudication Order"), that the provisions of law alleged against the noticee was not established and accordingly disposed off the case without levy of penalty. The following observations were inter alia made in the Adjudication Order :

"……………… 18. I note from the submissions made by the Noticee that the Noticee is a registered intermediary carrying out the business of broking and is majorly involved into arbitrage / jobbing activities / proprietary trading. Further, I note from the submissions made by the Noticee with respect to the matching of trades due to the algo trading software system used by the Noticee and that if the self trades are counted and examined at the terminal / trader id level then the number of internal matching is much lower than the one alleged in the SCN. Further, I note that the volumes traded on the day of listing of the IPO of BGIL were high and the percentage of matched trades (that too due to the system adopted), if compared to the total traded volumes, is meager. On examining the trade and order logs, I note that the number of shares getting matched in a single trade is very less in number (at times even one share) and is only on account of the system settlement. However, the extent of concentration on the day of listing is exceptional and unacceptable even in any extreme volatile situations. The Noticee should look into this aspect and remedial steps should be taken for avoiding such instances. 19. Further, there is no allegation against the Noticee that it had indulged in price manipulation. The evidence available on record is insufficient to hold that the trades executed by the Noticee contributed to the creation of artificial volumes in the scrip. Also, I find that the allegation against the Noticee of aiding and abetting its clients in creating a misleading appearance of the scrip by executing fictitious trades would not stand as the Noticee had done only proprietary trading. Accordingly, it is not necessary to go into the merits of the other submissions made by the Noticee.

20. In view of the aforesaid observations and findings, I conclude that the violation of provisions of Section 12A (a), (b) and (c) of the Act read with Regulation 3(a), (b), (c), (d) and 4(1) & 4(2)(a) of the PFUTP Regulations and Regulation 7 read with Clause A as mentioned in Schedule II of the Broker Regulations do not stand established. 21. In view of the above, after considering all the facts and circumstances of the case and exercising the powers conferred upon me under section 15-I(2) of the SEBI Act, 1992, I hereby conclude that the charges levelled against the Noticee do not stand established and the matter is, accordingly disposed of. …………."

3. As the observations of the Adjudicating Officer (AO) regarding the impugned self trades were erroneous, the matter was called for examination in terms of the provisions of section 15-I (3) of the SEBI Act and a Show Cause Notice dated July 11, 2014 ("the SCN") was issued to the noticee advising it to show cause as to why appropriate penalty cannot be imposed against it in terms of section 15HA of the SEBI Act for alleged violation of section 12A(a), (b) and (c) of the SEBI Act read with regulations 3, 4(1) and 4(2)(a) of the PFUTP Regulations.

4. The above notice also advised the noticee to submit its reply and afforded an opportunity of personal hearing on July 17, 2014. On the date of the scheduled personal hearing, the noticee was represented by its Managing Director and Compliance Officer, who tendered the reply dated July 16, 2014 to the SCN issued to the noticee in the matter. The Managing Director also made oral submissions on the lines of the above reply. The following documents (enclosures to the aforesaid reply) were also submitted in the personal hearing : (a) File containing Copies of Noticee's Letter dated May 20, 2013 addressed to the Adjudicating Officer, Noticee's reply dated May 27, 2013 with Annexures 1-10, Noticee's additional reply dated October 09, 2013 with Annexures A & B and Record of proceedings before the Adjudicating Officer for the hearing held on October 09, 2013. (b) NSE trade log for BGIL for July 28, 2011 (Annexures 6A-6J) and BSE Trade Log for BGIL for July 28, 2011 (Annexure 7A) (c) Copy of Adjudication Order dated 30.04.2014 - Exhibit A to the Reply dated July 16, 2014 (d) Proprietary Algo Network Diagram – Exhibit B (e) Self trades vis-à-vis Market volumes on BSE and NSE (3 pages) – Exhibit C.

5. The noticee inter alia made the following submissions vide its reply dated July 16, 2014 :

a) The present SCN is wrongly issued against the noticee as the Adjudication Order has concluded that the charges levelled against the noticee do not stand established, and consequently there is no question of levy of any monetary penalty on the noticee.

b) Section 15-I (3) can be invoked by the Board (SEBI) only in the event of establishment of guilt and levy of penalty by the AO, the amount of which may be enhanced if the circumstances of the case so justify. In the present matter, the noticee has been held as “not guilty” and consequently the question of levy of monetary penalty did not arise. As there is no question of levy of monetary penalty as per the Adjudication Order, there cannot be a question of any enhancement of penalty by the Board. Therefore, on this preliminary issue alone this SCN needs to be withdrawn/dropped against the Noticee.

c) The averment in the SCN “that AO while observing that Noticee had executed 4,46,660 shares of self trades at BSE i.e. 9.86% of the Noticee’s volume and 4,73,638 shares of self trades at NSE i.e. 10.45% of the Noticee's volume” have not at all been mentioned by the AO in his observations or conclusions. On the contrary, the Adjudicating Officer ("the AO") has concluded that the actual number of self trades are far lower than what was alleged in the SCN, and his findings are in paragraphs 18 to 20 of the Adjudication Order. In fact, AO has observed correctly that the total number of matched trades as a percentage of the total market volume is meagre and the number of shares matched at each trade is very less, as low as 1 share. The AO further states that his conclusion is based on his detailed examination of order and trade logs of the noticee. Thus, the current SCN not only disagrees with the conclusion arrived at by the AO, it also seeks to ignore the factual data based on which the AO arrived at his conclusion in the Adjudication Order on the actual number of “Self Trades” vs. alleged number in the SCN.

d) In the present SCN, only a certain portion of the order has been reproduced, without examining the detailed finding of the Adjudication Order passed on the basis of documentary evidences and submissions made by the noticee.

e) Before verifying the facts on record, it has been deemed presumed by SEBI that all “Self Trades” are fictitious and reprehensible, admittedly manipulative in nature, illegal in nature, obviously fictitious and made only to create false volume on the trading screen of the Exchange. In paragraph 8 of the SCN, there is no mention of the word fictitious or illegal. It appears that SEBI has predetermined its position and opinion on this issue, some of which are not at all alleged in the original SCN against the Noticee. Therefore, the noticee submits that the fresh allegations are being made against it, which is beyond the scope of the earlier SCN and the Adjudication Order.

f) It also appears that the mere phenomenon of “Self Trades” is being equated with “synchronized” and/or “circular” trading and associated with malicious intent. The occurrence of “Self Trades” at the noticees’ end was a mere technological by-product related to the high speed of trading and number of terminals deployed to conduct Ultra High Frequency Trading and not a premeditated or orchestrated game plan to make illegitimate gains at the cost of other market participants.

g) If the mere occurrence of “Self Trades” was indeed illegal, fictitious, etc it would have found clear mention in any of the SEBI Acts, Rules, Guidelines including Algo Guidelines, and/or the NSE/BSE Byelaws, manuals, circulars issued till date. There is no mention of the word “self trade” in any guidelines issued till date, and therefore the legitimacy or illegitimacy of such “Self Trades” is intricately linked to the “intention” or “motive” behind the occurrence. The Adjudication Order has considered this linkage while concluding that “On examining the trade and order logs, I note that the number of shares getting matched in a single trade is very less in number (at times even one share) and is only on account of the system settlement.”

h) Further, the present SCN has failed to appreciate the facts on record and understand the mechanism of Ultra High Frequency Trading (UHFT) and the bonafide reasons for self trade arising while trading in the stock market. The allegation of illegal “Self Trades” has been wrongly applied and the facts relating to the said charge of “Self Trades” in the SCN has been misinterpreted, and that the method adopted by SEBI in the present SCN for determining and identifying the “Self Trades” for proprietary trades based on member code was incorrect procedure adopted by SEBI and the bonafide reasons are detailed as under:

i) The entire trading activity of the noticee in BGIL during the day 28th July, 2011, as referred to in the SCN, was carried on proprietary account through the approved Algo trading software and no manual order punching was undertaken by any dealer.

j) Further, in case where a particular member has a large brokerage business spread across multiple clients, each of whom have a unique client code (UCC), SEBI recognizes “Self Trades” only at the client code (UCC) level and not at the member code level. This is so because distinct clients may co-incidentally match the trade at the same broker, based on individual and independent trading ideas and orders.

k) On the other hand, members whose business is primarily proprietary employ a large number of traders, who trade with independent 'trade ideas'. At the member level though, all the trades are executed under the members “pro” code only, as the member is not permitted to allot multiple codes to itself. To overcome the issue of trade identification, SEBI and the respective exchanges have assigned each trader with a unique user/trader Id which is the CTCL Id. This Id is unique for each trader, just like the UCC allocated to an Investor/Client. As each of the traders are independently setting trading parameters, it is entirely possible that trades emanating from these unique term CTCL ids may match as “Self Trades”. Therefore in case of 'pro' account trades, the equivalent of the UCC is the Unique Term CTCL Id and any determination of “Self Trades” ought to be done at this level and not at the member level, as is done in the case of UCC. The chart of Proprietary (Algo) Trading Network Diagram was enclosed to illustrate the difference between exchange connectivity at “member level” vs “trader level”.

l) Based on this explanation, as per the data already submitted, the number of “SELF” trades in BGIL was a mere 47,387 quantity in NSE and 509 on the BSE. The AO has rightly understood the fact that “Self Trades” have to be calculated at the dealer/trader level and has rightly concluded that “Further, I note from the submissions made by the Noticee with respect to the matching of trades due to the algo trading software system used by the Noticee and that if the self trades are counted and examined at the terminal / trader id level then the number of internal matching is much lower than the one alleged in the SCN.”

m) There was no “synchronization” of trading between its traders/dealers who were acting independent of each other, nor has it been alleged in either of the SCNs issued to the noticee.

n) SEBI has wrongly concluded the percentage of “Self Trades” being 9.86% in BSE and 10.45% in NSE, by linking it to the total volume of the trades of Noticee where is incorrect. It should be compared with the total market volume on 28th July, 2011. The noticee enclosed the details of percentage of its “Self Trades” vis-à-vis the market volume in NSE and BSE as ‘Exhibit – C’. If correctly applied at the dealer/trader level, the level of “Self Trades” of the noticee amounts to a paltry 0.01% of NSE volume for BGIL on the day and 0.001% of BSE volume on the day. The AO therefore correctly concluded in his findings that “Further, I note that the volumes traded on the day of listing of the IPO of BGIL were high and the percentage of matched trades (that too due to the system adopted), if compared to the total traded volumes, is meager”.

o) The HFT trading entails placing of a large number of orders, both buy and sell (based on meeting spread parameters) all within a split second. Further, as the exchanges limit the number of messages per minute per lease line, this necessitates a large number of lease lines to be installed by members doing high frequency trading, and multiple servers need to be installed. At the server or CTCL level, the orders driven by strategy of each trader (Unique Term CTCL) is independently sent to the exchange. It is possible that 2 traders, following independent parameters of trading may match some trades. However, such matching takes place in the market with full transparency and as argued, should not be recognized as “Self Trades”.

p) As the system of HFT entails entry and exit at extremely high speed and frequency, stop losses are set on time basis, probably close to 1 second. HFT trading entails placing both buy and sell orders at the same time based on spread available. Due to system latency and also exchange connectivity latency, there tends to be buffering of messages at times. This buffering sometime leads to a small quantity of trades being “Self Traded” even at the same Unique Term CTCL Id. These are however very insignificant in quantity and random in nature. Besides, at the speed at which the trade gets matched, it would be not visible to the naked eye on the trading screen, and consequently completely incapable of inducing or misleading any other market participant.

q) It is practically impossible to ensure no occurrence of “Self Trades” at member level, as the technology would be unaffordable as it involves multiple lease lines, servers and locations. It may only be possible for the exchanges to build a system to prevent this occurrence. Further, mere occurrence of “Self Trades” is neither a breach of any Exchange or SEBI rules, regulations or guidelines. It is only when such trades are entered deliberately in synchronization, collusion, coordination, with an intent to defraud or create an impression of trading in order to make unlawful gain that the provisions of unfair trade practice, etc. apply.

r) In this matter, there is no averment or any allegation of price manipulation or fixing, having any relationship with other persons/entities who had traded in the scrip BGIL in the SCN or enabling /making any unlawful gains for itself or anybody.

s) In view of the above, the present SCN for enhancement of penalty may be withdrawn as there is no penalty levied by AO nor there is any infirmity in AO order. It appears that SEBI has issued this SCN only on account of wording appearing in paragraph 18 that “the extent of concentration on the day of listing is exceptional and unacceptable even in any extreme volatile situations.”. This is a fact that on the listing day there was huge volume in the market in the scrip BGIL and in that context it has been mentioned by the Ld. AO. However, SEBI appears to have misinterpreted these words without examining the facts on record. It is also a fact that mere volumes in the market do not lead to conclusion of manipulation. The charges alleged under Section 3 (a),(b),(c) & (d) and 4 (1) & 4 (2) (a) of the PFUTP Regulations have been explained in detail and based on these explanations and material evidence on records the said changes have been dropped against the noticee by the AO. Hence, the present SCN is ought to be withdrawn/dropped against the Noticee.

6. As it was noticed that the relevant provisions of the Code of Conduct for Stock Brokers under the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 as alleged in the proceedings against the noticee was inadvertently not mentioned in the SCN dated July 11, 2014, the same was rectified by issuing an addendum (to the SCN) to the noticee. The matter was placed for further hearing on July 25, 2014, and the noticee was advised to make further submissions including submissions with respect to the alleged violation of the relevant provisions of Code of Conduct for Stock Brokers. Due to administrative exigencies, the hearing in the matter was pre-poned to July 24, 2014. In this hearing, the noticee, represented by Mr. Ravi Kumar Varanasi, Advocate, and Mr. Rajesh Baheti made submissions. Mr. Manish Garg (Compliance Officer) and Mr. Deepak Rane, Advocate, were also present. Additional reply dated July 24, 2014 was filed, inter alia stating the following :

(a) The noticee while acknowledging the receipt of the addendum to the SCN, states that it relies on the submissions made before the AO; (b) Noticee reserves the right to file additional reply to the addendum show cause notice, if required; (c) The SCN dated July 11, 2014 and the addendum to SCN dated July 21, 2014 under section 15-I(3) cannot be applied to the noticee as there is no penalty levied by the Adjudicating Officer against the noticee. Therefore, the quantum of penalty cannot be enhanced against the noticee; (d) The nature of erroneous order passed by the Adjudicating Officer has not been clearly stated in the SCN and addendum; (e) The premise under which the SCN has been issued is for the reason that the AO has stated in paragraph 18 of the order that "However, the extent of concentration on the day of listing is exceptional and unacceptable even in any extreme volatile situations. The Noticee should look into this aspect and remedial steps should be taken for avoiding such instances". The observations of the Adjudicating Officer has been mis-interpreted while issuing the SCN under section 15-I(3) to the noticee.

The issue raised in the SCN of the Adjudicating Officer and the Order is in respect of the Self Trades and not about of the volume of transactions on the said day of trading. The volume of transactions has been on account of the approved algo trading software used by the noticee as per the applicable norms framed by the NSE/BSE and the guidelines of SEBI has not been violated; (f) 'Self trade' has not been defined in the SEBI Act, PFUTP Regulations or any of the Guidelines of SEBI. Further, the said self trades being treated as fictitious self trades is incorrect analogy adopted by SEBI. There are no fictitious self trades as all the transactions/trades have been placed on the approved trading terminals of the stock exchange and there are no trades outside the market. Therefore, the same cannot be treated as fictitious trades. The self trades have happened on account of multiplicity of user ids, each of whom act independent of each other and system/telecommunication latency and the matching has taken place through the NSE and BSE system and only the orders have been placed through its trading terminals using the Algo Trading Software approved by the exchanges; (g) The quantum of self trades cannot be aggregated at member level in case where member has multiple users/user ids trading independently; (h) The self trades cannot be treated as a deliberate act as the noticee has not actively sought to match orders with each other.

There are several factors which lead to self trades, which are beyond the control of the noticee; (i) A few self trades were a result of genuine order placement and there is no mechanism with NSE or BSE to weed out such order and such a technology has to be developed by the exchanges to avoid self trades; (j) In the SCN issued by the Adjudicating Officer and also in the SCN issued in this proceeding, there is no allegation of price manipulation against the noticee or having matched trades with other entities who are involved in BGIL trading by way of synchronised trading or circular trading or any fund movement from the noticee to other persons/entities or any other act which has hampered the securities market nor there is any evidence on record to show that any investor has suffered losses in the market. There is no allegation to that effect in the SCN of the Adjudicating Officer or any linkages drawn with any other persons/entities in the SCN; (k) Hence, there are no factors that lead to enhancing the penalty on the noticee under section 15-I(3). There are no grounds leading to violation of section 12A(a), (b) and (c) of the SEBI Act read with regulations 3, 4(1) and 4(2)(a) of the PFUTP Regulations and regulation 7 read with Clause A as mentioned in Schedule II of the Broker Regulations; (l) The Adjudicating Officer has rightly passed the order in favour of the noticee and is a cogent order and ought to be upheld by SEBI.

The present SCN under section 15-I(3) may be withdrawn as against the noticee.

7. The noticee also filed written submissions vide letter dated July 28, 2014 and inter alia made the following submissions : (a) The issue of self trade has been misinterpreted in the case of the noticee. There is inherent difference between self trades happening manually and self trades happening while trading using the Algo Trading Software. In manual trading, the self trades happen on account of an intention and a specific motive to hamper the system of the market and normally the intention is to match 100% of the order quantity in question. However, in the case of the noticee the event was incidental to the operation of the Approved Algo Trading Software, the orders are placed from different terminals which are connected to the servers of NSE and BSE respectively through the leased lines of NSE or BSE. The said orders are processed through the SERVERs linked to the NSE/BSE for trade confirmation. As there are several orders placed simultaneously through various terminals using the Approved Algo Trading Software of the noticee by putting the parameters of orders which vary from 100 shares to 1000 shares and with a value below Rs.1 lakh, there are several orders placed and matching taking place in micro second time frame and due to latency in the leased lines, some of the orders match with some other terminal linked to the Approved Algo Trading Software of the noticee. (b) The noticee cannot have any 'control' over the internal working of the software and there is no intention or motive to disturb the equilibrium of the market by carrying out self-trades. The self trades are ultimately waste trades and there is no benefit to the noticee. The noticee has to pay STT and other charges on such self trades. The algo trading software has been approved by the stock exchange and as per the SEBI Guidelines dated March 30, 2012 and May 21, 2013 on Algo Trading Software. (c) All the compliances for carrying on Algo Trading have been obtained and there are no anomalies in the System Software of Algo Trading as mock demonstrations have been given to the stock exchanges and the same have been approved. The transactions have been carried out by the noticee only thereafter. (d) There are no fictitious self trades as all the transactions/trades have been placed on the approved trading terminals of the stock exchange and there are no trades outside the market.

The self trades have happened on account of latency and the matching has taken place through the trading terminals of the noticee by using the Approved Algo Trading Software. (e) The issue of self trades has to be examined by SEBI and stock exchanges and at present the stock exchanges have no mechanism to prevent accidental self trades from the system. In some stock exchanges in other countries, there are technology adopted to prevent self trades. Due to the increasing volumes, there will be self trades while carrying on trades in the market through the Approved Algo Trading Software and cannot be surpassed unless a joint effort is made by SEBI, NSE/BSE and members of the stock exchanges to address this issue in the right earnest and for healthy markets with proper systems and procedures and which systems and procedures are evolving in nature. (f) The business model of the noticee is to provide liquidity to the market through algo driven high frequency trading. It has actually benefitted the investors at large as the impact cost of the traded items was lowered by the noticee's trading strategy, and the minor quantity of self trades was only a technical fall out of the trading system, which by itself has caused no harm to any other player in the system, and neither has the noticee derived any benefit from the same. (g) There are no factors that lead to enhancing the penalty on the noticee under section 15- I(3) against the noticee. There are no grounds leading to the violations as alleged and the Adjudicating Officer has rightly passed the order in favour of the noticee as it is a cogent order and ought to be upheld by the Whole Time Member.

8. I have considered the Adjudication Order dated April 30, 2014 passed in respect of the noticee, the SCN, submissions made by the noticee and other material available on record. The noticee is a stock broker and has placed proprietary orders through algorithmic trading system.

9. Before proceeding, it needs to be understood as to what a 'self trade' is. A 'self trade' is a trade wherein a person places both the buy and sell orders in a scrip and such orders match resulting in a situation where the person is both the seller and the buyer in a trade. In such a case, the beneficial ownership of those traded shares do not change. In this regard, I also note these observations made by the Hon'ble Securities Appellate Tribunal in the following matters with respect to 'self trades' :

(i) Order dated 23.4.2012 in Appeal no. 21 of 2012 - Systematix Shares & Stocks (India) Limited vs. SEBI : "…. It has been held in several cases by this Tribunal that self trades are fictitious and reprehensible. Trades, where beneficial ownership is not transferred, are admittedly manipulative in nature. ….."

(ii) Order dated 11.05.2012 in Appeal No. 76 of 2012 (H.J. Securities Pvt. Ltd. vs. Securities and Exchange Board of India) :

"………The appellant is a stock broker and he understands the implication of his actions well. Self trades, which implies the trades in which both buyer and seller are the same party and does not result in change of beneficial ownership are fictitious in nature and they create artificial volume in the scrip sending wrong signal to the lay investor about trading in the scrip. ……… "6. We have considered the rival submissions and are inclined to agree with the view expressed by learned counsel for the Board. The modus-operandi of the appellant in operating through the 19 jobbers from different locations has resulted in fictitious trades / self trades where the buyer and the seller are the same party. Such trades create artificial volume in the traded scrip and send wrong signal to the lay investor with regard to trading in the scrip. The Board has come to a definite finding that the appellant had executed self trades on the day of listing for 2,00,725 shares which was 7.08% of its total quantity i.e. one in every fourteen trades of the appellant’s total buy quantity on that day was a self trade on its proprietary account in terms of volume. Similar is the situation on the sale side. It is further noted by the Board that trading pattern in the subsequent day also reflects that one out of eleven trades of the appellants’ total buy quantity was a self trade on its proprietary account in terms of volume. This finding of the Board is not disputed by the appellant. If the appellant was operating through jobbers from different terminals, he should have placed some mechanism in place to ensure that his trades do not result in self trades. Simply because the number of such self trades is not large by itself cannot justify execution of self trades. The appellant is free to adopt any business model but he has to ensure that whatever business model he adopts, it is in conformity with the regulatory framework. Since the business model adopted by the appellant has resulted in self trades which are considered to be fraudulent, we cannot find any fault with the impugned order which has held the appellant guilty of violating the provisions of FUTP regulations as well as code of conduct for the stock brokers. We are, therefore, not inclined to interfere in the matter." {Emphasis supplied}

(iii) Order dated 03.12.2012 in Appeal No. 211 of 2012 - Anita Dalal vs. SEBI :

"7. The appellant has been found guilty of self trade as well. Self trades admittedly are illegal. This Tribunal has held in several cases that self trades call for punitive action since they are illegal in nature. In M/s. Jayantilal Khandwala & Sons Pvt. Ltd. vs. Securities and Exchange Board of India (Appeal no. 24 of 2011 decided on June 8, 2011) this Tribunal has held that “one cannot buy and sell shares from himself. Such transactions are obviously fictitious and meant only to create false volumes on the trading screen of the exchange”."

10. From the above cited orders of the Hon'ble SAT, I note that - (a) Self trades are fictitious and reprehensible; (b) Trades where beneficial ownership is not transferred, are manipulative in nature; (c) Self trades create artificial volume in the market; (d) Whatever be the business model, it should ensure that such model complies with the regulatory framework;

11. As regards the case against the noticee, the following facts are important : (a) The noticee is a stock broker and has indulged in proprietary trades in the scrip of BGIL. (b) The noticee has employed the 'Algo Trading' Software for placing orders in the market. (c) This algo software was also used to place orders in the scrip of BGIL on the listing day/first day of trade. (d) Self trades had occurred while trading in the scrip of BGIL using the algo software.

12. The noticee has been alleged to have contravened the following provisions of law : Relevant provisions of the SEBI Act, 1992: Section 12A. No person shall directly or indirectly – (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made there under;

Relevant provisions of PFUTP Regulations: 3. Prohibition of certain dealings in securities No person shall directly or indirectly— (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— (a) indulging in an act which creates false or misleading appearance of trading in the securities market;

Relevant provisions of Broker Regulations: Stock brokers to abide by Code of Conduct. 7. The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II. Clause A of the Code of Conduct for Stock Brokers A. General. (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (2) Exercise of due skill and care: A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (3) Manipulation: A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.

13. I have perused the above provisions. SEBI has issued two Circulars stipulating broad guidelines for algorithmic trading – viz., Circulars dated March 30, 2012 and May 21, 2013. In terms of SEBI Circular dated March 30, 2012, Algorithmic trading is defined as follows :

"Algorithmic Trading – Any order that is generated using automated execution logic shall be known as algorithmic trading."

The difference between a manual trading and algo trading is that in manual trading, orders are placed by dealers/investors who are natural persons, whereas in algo trading the orders are generated using pre-programmed computer software systems. However, all the regulations and prohibitions that govern order placement through manual means would equally apply to algo trading also. Vide the above SEBI Circulars, additional conditions have been imposed with respect to algo trading.

14. General prohibitions are specified under the PFTUP Regulations with respect to placement of orders which result in fraudulent and unfair trades, artificial trades including self trades, synchronised trades and structured trades. Such prohibitions would also apply to orders emanating through algo trading systems. Therefore, the submission of the noticee that there is no express stipulation by SEBI in the above Circulars regarding avoidance of self trades by such automated order placement system cannot be accepted. A stock broker is mandated, under clause A(5) of the Code of Conduct for Stock Brokers, as specified in Schedule II of the Stock Brokers Regulations, to abide by all the provisions of the SEBI Act and the rules, regulations issued by the Government, SEBI and the stock exchange from time to time as may be applicable to him. Further, the SEBI Circular dated March 30, 2012 on 'Broad Guidelines on Algorithmic Trading' has also clearly specified "................. that the stock broker’s system facilitate orderly trading and integrity of the securities market .....". Therefore, whatever be the business model or strategies employed by the noticee for placement of orders in the market, the same should ensure that activities that are prohibited should be avoided. The same has also been emphasised by the Hon'ble SAT in the case of H.J. Securities Pvt. Ltd. As a stock broker, the noticee has a duty to preserve the integrity and equilibrium of the securities market.

15. Further, persons are prohibited in the securities market from indulging in 'self trades' where there is no transfer of beneficial ownership of the shares traded. The systems of the noticee should have taken care of such a contingency. As observed by the Hon'ble SAT, a person adopting any business model for trading in the securities market should ensure that such model complies with the regulatory framework. The algo trading software utilised by the noticee ought to have been written in such a manner to ensure that that it complies with the regulatory framework, including the avoidance of self trades. The noticee has failed to ensure that its algo system has such a check. Accordingly, any algo system, used by a trader/stock broker, which is unable to eliminate patently fictitious self trades, is violative of securities laws and the user of the same should be held responsible for the violations. The noticee's inability to prevent self trades is obvious while his insistence that such patently fictitious and reprehensible trades should be ignored is not only unacceptable, but irresponsible as well.

In view of the above, I find that the noticee has not exercised due care and diligence in the conduct of its business and the compliance with statutory requirements, as required under Clause A of the Code of Conduct for stock brokers.

16. The noticee has been alleged to have contravened the provisions of section 12A of the SEBI Act and the provisions of the PFUTP Regulations. In terms of regulation 4(1) of the PFUTP Regulations, no person shall indulge in a fraudulent or an unfair trade practice in securities. Further, as per regulation 4(2)(a), a person should not indulge in an act which creates false or misleading appearance of trading in the securities market. As discussed above, self trades are fictitious, creates artificial volume in the market, manipulative and reprehensible. Considering the facts and circumstances of the case, the submissions made by the noticee, its inability to prevent self trades while trading through its algo trading system, leads to the conclusion that the noticee has contravened such provisions of law.

17. The noticee is alleged to have indulged in self trades in the scrip for a total quantity of 9,20,298 shares on the BSE (4,46,660 shares) and NSE (4,73,638 shares) and executed 16 self trades on BSE and 1,375 self trades on NSE from the same terminal for a total quantity of 81,436 shares in the scrip. The noticee has contended that self trades should be considered at a dealer/ id level and not at the broker level. Considering the above manner of treatment, the noticee has submitted that it had executed self trades in BGIL for 47,387 shares in NSE and for 509 shares on the BSE. I have considered the above submissions. It should be appreciated that self trades are fictitious, as there is no change in the ownership of shares. The different CTCL ids belong to the same legal entity i.e., of the noticee, and matching of trade between them will have to be considered as a 'self trade' by that entity. The noticee therefore cannot define self trade to suit itself.

18. In view of the above discussions and considering the fact that self trades done without change of ownership of such security are artificial trades, the manner of determination of quantum of self trades as proposed by the noticee cannot be accepted. I also note that there is no allegation of price manipulation against the noticee. I also note from the Order of the AO that on the listing day i.e., on July 28, 2011, a total of 4,75,78,807 shares (on NSE) and 4,07,25,468 shares (on BSE) were traded. I have also noted that the percentage of volumes of self trades done by noticee as against the total traded volumes on BSE and NSE is less than 2%. However, I note that percentage of self trades as against the noticee's total trades in BSE and NSE is 9.86% and 10.45% respectively. This quantity of matching by way of self trades is absolutely not acceptable and the leniency shown by the AO would be detrimental to market discipline. Showing any leniency would convey a wrong message that the users of software programmes are not responsible for the performance of the programme. In today's age of computerised trading such wrong message would have wide implications. Therefore, I am of the considered opinion that the leniency shown by AO is misplaced.

19. The noticee has also contended that as there is no penalty imposed by the AO, there is no scope to 'enhance' the penalty under section 15-I(3) of the SEBI Act. In this regard, I place reliance on the judgement of Hon'ble Madras High Court in the matter of Bhavani Mills Limited Vs State of Tamil Nadu [dated: October 03, 1991] wherein the Hon'ble Court has stated as under: "... ... the word "enhance" is wide enough to enhance the penalty from zero to something. ... ... the word "enhance" is sufficient enough to enable the Tribunal to impose penalty which was not imposed ... ..." In view of this, I am unable to accept the contention of the noticee.

20. In view of the foregoing discussions and observations, I, in exercise of the powers under sections 15I-(3), 15HA and 15HB of the Securities and Exchange Board of India Act, 1992 read with section 19 thereof, hereby dispose of the SCN dated July 11, 2014 issued to Crosseas Capital Services Private Limited in this proceeding, with the following directions:

a) The noticee, Crosseas Capital Services Private Limited shall review its own systems and take appropriate steps that self trades and other categories of trades which are prohibited under the SEBI Regulations/guidelines are avoided. The noticee may get its systems verified by the stock exchanges to their satisfaction.

b) For the default committed by the noticee as found above, a penalty of Rs.5,00,000/- is imposed on the noticee. This penalty shall be paid to SEBI, within a period of 45 days from the date of receipt of this Order, by way of a Demand Draft drawn in favour of "SEBI – Penalties Remittable to Government of India" and payable at Mumbai. The said Demand Draft shall be forwarded to the General Manager - Enforcement Department, Securities and Exchange Board of India, Plot No. C4-A, "G" Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

Date: November 13th, 2014 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA