SAT | The strategy of ‘momentum trading’ is about creating its own momentum inimical to the interest of the securities market and is violative of PFUTP regulations

Securities Appellate Tribunal (SAT):The Bench of Justice Tarun Agarwala (Presiding Officer), Justice M. T. Joshi and Dr C. K. G. Nair Member dismissed the appeal on the ground that the trading strategy used by the appellants was violative of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations), 2003 i.e. PFUTP Regulations, 2003.

The facts of the case are such that the appellants have unilaterally manipulated the price of the scrip of Blue Blends by employing/adopting a strategy of trading called “Advancing the Bid”. According to this strategy, a person on one side of the trade places orders above or below the last traded price (LTP) resulting in an adverse impact on the market.  The Whole Time Member of Securities and Exchange Board of India i.e. SEBI debarred the appellants for a period of four weeks and vide order dated May 5, 2020, passed by the Adjudicating Officer of SEBI whereby a joint and several penalties of Rs 5 lacs have been imposed on the appellants. Aggrieved by the same, instant appeals was filed before the Securities Appellate Tribunal i.e. SAT.

Counsel for the appellants submitted that selling in minuscule quantity below the LTP itself does not prove manipulation. It was further submitted that appellants are big traders/jobbers dealing in several hundred scrips worth several crores; appellants trades resulted in both positive and negative LTP but SEBI cherry-picked some trades only to show negative impact; appellants followed a strategy called “momentum trading” i.e. being a big trader taking advantage of the movement in prices by placing a large number of orders and no meeting of the mind has been established and no other party has been debarred from the market.

Counsel for the respondents submitted that the strategy employed by the appellants in manipulating the market/price of the scrip is a unique one called “Advancing the Bid” which is found to be manipulative not only in the Indian jurisdiction but also in foreign jurisdictions like the European Union (EU). It was further submitted that selling below the LTP and that too on a large number of occasions is contrary to the normal market behavior and therefore, it stands on its own legs as violative of the stated provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

The Tribunal observed that the nature/pattern of trading adopted by the appellants is not in the nature of what a rational investor would do. A large number of sell orders were placed repeatedly on several trading dates at less than the LTP; it is illogical. Therefore, the contention of the appellants that it was following momentum trading has no meaning as by placing a large number of orders below the LTP the appellants themselves were creating a momentum.  When such trades are done on a large number of occasions, such as 166 times, one cannot but come to the conclusion that such trades are manipulative in nature.

The Tribunal thus held that the strategy of momentum trading adopted by the appellants was creating its own momentum inimical to the interest of the securities market. Even if it affected only about 10 % of the market volume in the scrip of Blue Blends, as contended by the appellants, it is no consolation since influencing 10% of the market by 2 entities is a significant deviation from market equilibrium. Therefore, dehors the connectivity issue itself, the appellants are in violation of the PFUTP regulations by the very nature of their trading strategy and trading pattern. It was further held “4 weeks restrain from the securities market as directed by the WTM and Rs. 5 lakhs joint and several penalty imposed by the AO are not harsh or disproportionate in the given facts and circumstances for us to interfere with the impugned orders. However, if the appellants so desire they may pay Rs 2.5 lakh each.”

 In view of the above, appeal failed and was dismissed.[B.P. Comtrade (P) Ltd. v. SEBI, 2020 SCC OnLine SAT 251, decided on 20-11-2020]


Arunima Bose, Editorial Assistant has put this story

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