Watch out! Stock exchange to cancel reversal trades if found not genuine

Those who misuse the stock exchange platform for transferring loss or profit will have to find other ways. That is because the country's biggest exchange, NSE, is set to make certain changes soon. With effect from July 7, NSE will implement a Reversal Trade Cancellation Mechanism (RTCM) on an intraday basis, wherein trades between two parties found to be creating artificial volume or booking profit/loss for taxation purposes will be annulled. The stock exchange, which had announced the changes in August last year, and all set to implement it. It will be for both stock and index contracts.

To begin with, the Reversal Trade Cancellation Mechanism will be released in the cash market segment and implemented in other segments subsequently.

How will trades be monitored and cancelled?

The exchange has communicated to the brokers that all trades between a pair of PANs will be monitored on an intraday basis. As and when a new trade takes place between a pair, the quantity of the trade will get aggregated to either of the legs. For instance, let's say PAN X is the buyer and PAN Y is the seller in the first leg, and in the second leg, PAN X is a seller and PAN Y is the buyer. At every trade instance after the above aggregation, wherever such aggregated quantity of two legs between PAN X and PAN Y breaches thresholds, the trade will be eligible for cancellation.

Quantity of reversals

According to the exchange's communication with the brokers, there will be a set parameter for the reversal of trades, which will be compared with the market gross traded quantity. The reversal mechanism has also been explained. The reversal quantity will be the quantity that is bought and sold within the pair of PANs (i.e. if a quantity of 1,500 is bought within the pair of PANs and a 1,600 quantity is sold within the pair of PANs, the reversal quantity will be 1,500. The exchange has also set a formula to determine the reversal ratio.

What will happen in case of Client code Modification?

Client Code Modification during market hours resulting in reversal of trade shall also be cancelled as a part of the RTCM mechanism.

The mechanism will apply to continuous normal markets. In case of reversal of trade in a share in the cash market segment, the exchange will automatically cancel the trade on an intraday basis. Upon cancellations of trades, brokers will get a message on the trading terminals depicting trading cancelled by the exchange.

All trades including the client code modification will be cumulated for the clients on a symbol and contract basis to validate the reversal conditions. The Reversal Trade Cancellation Mechanism checks will be done from 10:30 am for trades from 9:15 am to 10:30 am, and onwards until 3:00 pm, which means that the mechanism will not apply from 3:00 pm to 3:30 pm.

RTCM for which type of securities?

The RTCM mechanism will be made applicable for scrips or contracts that are relatively illiquid. The list of such scrips and contracts will be published by the end of the month and will be valid for the subsequent month. Last year, the exchange had indicated that stocks beyond the Nifty 500 would be included.

BSE has a similar mechanism, the Reversal Trade Prevention Check (RTPC), introduced in March 2016. In 2019, after a partial modification of the circular, BSE excluded its implementation in the equity derivatives segment. In this mechanism, trades are cancelled if it is found that the exchange platform is being used for manipulation.

SEBI had found massive misuse of BSE options contracts between April 1, 2014, and September 30, 2015. Due to the very high number of cases and increasing burden on the market regulator Securities Exchange Board of India  (SEBI) adjudication process, and consequently a high number of appeals in the Securities Appellate Tribunal, SEBI had to come up with a special settlement scheme twice.