MC Explains: What is Sebi's latest move to curb IPO price manipulation?

Stock exchanges have been asked to display details of cancelled orders in real time.

To curb price manipulation of initial public offers (IPOs), the market regulator has modified the call auction duration in the pre-open session and enhanced surveillance done by stock exchanges.

The pre-open session is the hour the stock is finally listed.

The regulator, after noticing that large number of orders are placed and cancelled to create a false sense of demand, during this hour has asked for duration of order placing/modifying/ cancellation to be shortened randomly, and asked exchanges to display details of cancelled orders on a real-time basis.

The new framework will come into effect from the 90th day of issue of the circular dated June 20.

Why is this step being taken?

In the circular, the Securities and Exchange Board of India (Sebi) informed why this step was being taken.

The circular said: "It was observed that during the call auction in pre-open session for certain IPO and relisted scrips, orders were placed at higher price in large volumes and significant portion of such orders were cancelled just before the closure of call auction session. This may have created false demand and supply and possibly manipulating the price of the scrips to the detriment of common investors."

MC Explains

How is call-auction being changed?

To curb this malpractice, the regulator has decided to introduce an element of randomness into the call-auction process.

Until now, the last hour before the listing has been divided into 45 minutes for entering, modifying and cancelling the order; 10 minutes for order matching and five minutes to transition from pre-open to normal trading session.

Henceforth, the first section of this--where order is being placed/modified/cancelled--will be closed randomly between the 35th and 45th minute. The random closure will be system driven.

What more do stock exchanges have to do?

The regulator has also asked the stock exchanges to enhance their surveillance mechanism to spot manipulations done during this last hour.

Towards this, in addition to their existing surveillance mechanisms, the exchanges will need to generate alerts based on the following parameters and submit the report to the regulator on an end-of-day (EoD) basis:

1. Cancelled quantity for a particular client exceeds 5 percent of total cancelled quantity across the market during the pre-open session.

2. Value of cancelled quantity for a particular client exceeds 5 percent of total value of cancelled quantity across the market during the pre-open session.

3. Cancelled quantity for a particular client exceeds 50 percent of total quantity placed by that client during the pre-open session.

4. Value of cancelled quantity for a particular client exceeds 50 percent of total value of quantity placed by that client during the pre-open session.

5.Modification of prices significantly away from previously placed order(s).

6. Stock exchanges can have additional parameters for generating alerts.

The exchanges have also been asked to seek explanation from clients for cancellations or modifications of orders done during the pre-open session.