In order to curb market abuse, the National Stock Exchange has now enhanced the responsibilities of stock brokers. In a June 2 circular, the exchange has asked QSBs (qualified stock brokers) to analyse the pattern of trading done by clients and detect any unusual activity.
On a monthly basis, QSBs now have to keep track of activity in deep OTM (out of money) contracts where clients are incurring losses.
Out-of-the-money (OTM) options are cheap since it requires a massive move in the underlying for the options to become profitable. At the same they are, at times, misused by high networth individuals looking to lower their tax liabilities by generating bogus losses through circular trading in deep OTM options.
Over the last couple of years, deep OTM options have also emerged as a convenient and low cost way for derivatives traders to reduce their net margin obligations as it helps them take an offsetting position for a small sum.
In addition, QSBs have to keep a tab on repeated delivery default, clients having significantly higher pay-in obligation compared to the income declared and unrelated clients having common numbers, devices or email ids.
On a daily basis, brokers need to monitor patterns such as pump and dump, circular trading, and front running. Front-running is an illegal method of profiting by an intermediary. The intermediary enters stock market minutes before a known big institutional investor enters the market, either to buy or sell shares.
Client placing large orders and cancelling them, thus creating a false impression of artificial demand in the scrips, should also be under QSBs' radar, as per the exchange.
Furthermore, fat finger, manipulative trades, and linked clients controlling substantial proportion of the market open interest in a contract, must be pro-actively identified, the NSE added.
"A quarterly report should be provided to the exchange on the portal within 15 days from end of the quarter," the circular stated.
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