Worth looking into and we are on it: SEBI chief on misuse of proprietary trading

SEBI Chairperson Madhabi Puri Buch (File pic)

Market regulator Securities and Exchange Board of India (SEBI) on November 25 said that the misuse of proprietary trading is being seriously looked into. "We are investigating it closely," said SEBI chief Madhabi Puri Buch while addressing the media.

Prop trades as they are called in market parlance are trades done by the broker in his own book and not for the client. Over the past year, Moneycontrol has highlighted how this route is being misused by some brokers.

Also Read: The shadow market for ‘proprietary’ stock trading is showing signs of unrest

For instance, client trades are being passed off as prop trades by brokers to evade margin rules and taxes.

When an order is put through a trading terminal, it has to be marked as either a proprietary trade or a client trade. If the trade is on behalf of a client, the broker needs to collect margins from the client. If the broker tags the trade as being proprietary, the margin requirement will be adjusted from the broker’s funds already deposited with the stock exchange as part of net worth compliance.

Furthermore, some proprietary broking firms are allegedly sidestepping SEBI regulations by illegally letting out their terminals to clients by passing them off as employees. As they are called in market parlance, the prop brokers engage traders as ‘team leads’ and then ask them to hire more traders below them.

Also Read: MC Investigates: Prop brokers use the hawala route to receive payments for illegally renting out terminals

The share of proprietary trades on the NSE as a percentage of the overall derivatives turnover has rocketed from around 33.5 percent in January 2020 (just before the pandemic hit) to 59.5 percent in July 2023.

On the BSE, the share of proprietary trade percentage of the overall derivatives turnover is around 75 percent (according to the SEBI annual report for FY23) but on a much smaller base.