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TMI Blog2019 (6) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... ces can vary suddenly from ₹ 100 to ₹ 10 or even ₹ 1 within a fraction of a second except restating that the automated trading system of a highly liquid options market is so complex and fast changes in prices based on various factors are expected in milliseconds or even microseconds. In a liquid market, the market moves even within the time when an order is placed and a huge order itself will move prices are known to all experienced traders like the appellant. It is an admitted fact that the traders of the appellant did not use the limit order route. It is also an admitted fact that a large quantity of NIFTY Options were placed for sell in the last few minutes of the closure of the trading day which was also the expiry day of the contract. It is also a generally known fact that on the expiry day of a contract prices tend to fall and, therefore, executing large orders will invariably gravitate towards lower prices. Here the price range was set by the Black-Scholes methodology and in the range of ₹ 0.05 to ₹ 570.10 for NIFTY put Options ₹ 6000 and between ₹ 0.05 to ₹ 687.45 for NIFTY call Options ₹ 5700. When a methodology w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate with Mr. Deepak Rane, Advocate JUDGMENT Per: Dr. C.K.G. Nair 1. This appeal is filed challenging the order of the Independent Oversight Committee ( Oversight Committee for short) of the National Stock Exchange of India Limited ( NSE for short) dated July 07, 2017. By the said order the Oversight Committee rejected the request of the appellant for annulment of certain trades executed on September 26, 2013 in NIFTY Options Contract. 2. The relevant undisputed facts in the matter are the following:- a) On September 26, 2013 at around 3:20 pm, the Ahmedabad Branch office of the appellant decided to square-off and close existing intraday open positions in NIFTY Options of five of its clients. Since these Options Contracts were expiring on this day, approval of the clients was also sought and obtained for squaring-off their open position before closure of the trade hours since squaring off attracts lower Securities Transaction Tax ( STT ). b) The dealers prepared batch files and placed orders around 3:26 pm, opting for the market rate and not the limit rate . This would m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. However, extremely low price at which some of the trades got executed were clearly against the various circulars issued by the Respondent (NSE) and NSE should investigate whether there was any fraudulent activity involved in the matter. Accordingly, the appellant sought annulment of the trades and sought further hearing in the matter and requested that in the interim not to make payout to the counter party brokers. It was also submitted that as per the bye-laws of the Stock Exchange as well as its Clearing Corporation annulment of trade is possible on account of factors as in the case of the trades of the appellant got executed on September 26, 2013. g) NSE after forwarding the representation of the counter parties to the appellant and after hearing the parties including the counter parties rejected the appellant s application for annulment on May 06, 2014. h) The appellant filed an Appeal No. 297 of 2014 against this order in this Tribunal. i) On August 26, 2014 this Tribunal passed the judgement in the matter of M/s. Emkay Global Financial Services Limited V/s The National Stock Exchange of India Limited and Others (Appeal No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the NIFTY Options Contracts traded by the appellant in the few minutes before closure of the trading hours on September 26, 2013 and showed us how price moved drastically in split seconds between 3 digit and single digit ranges and submitted that only the best 5 prices quoted are shown on the trading screen and the appellant would not know what is beneath these best prices shown on the screen. Therefore, the appellant assumed that in the light of the instructions to brokers not to place orders at far away prices failing which disciplinary action would be initiated, prices too far away from what is shown on the trading screen are not in the system. Though, the appellant initially requested cancellation of all impugned trades, later on it was brought down to trades matched at less than 50% of the last traded price / market price which was further restricted to the trades in respect of the 10 respondents in this appeal. Accordingly, it was submitted, that for the genuine mistake of the dealer traders of the appellant by placing a market order instead of a limit order, the bye-laws of the Exchange and Clearing Corporation allow annulment of trade and the present matter is a fit case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belonging to an earlier regime. The F O consolidated Circular dated April 24, 2012 issued by the Respondent (NSE) to all its members clearly states the base price and operating ranges applicable to the contracts and how the theoretical price of such contracts are arrived at by using the Black-Scholes model. It is a complex pricing model for options pricing and the minimum and maximum prices are decided by this model rather than decided by any manual exercise. Though, subsequently by a Circular dated April 11, 2014 this range has been narrowed and circuit filter introduced, at the relevant time of September 2013 there was no such specification and the range was automatically decided by the said Black-Scholes model. The appellant, like other brokers, was fully aware of this. The submission that they could see only the five best prices available on the screen, though is a fact, the appellant was fully aware that the price could potentially go down up to ₹ 0.05 as per the Black-Scholes based formula. 9. He further submitted that the market price was punched erroneously by the trader-dealers, instead of the limit price, does not stand to scrutiny because of the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Before proceeding further, bye-law 5 of Chapter VII of the bye-laws of NSE is reproduced below for convenience:- Inviolability of Trade 5 (a) All the dealings in securities on the Exchange made subject to the Bye Laws, Rules and Regulations of the Exchange shall be in-violable and shall be cleared and settled in accordance with the Bye Laws, Rules and Regulations of the Exchange. However, the Exchange may by a notice annul the deal(s) on an application by a Trading Member in that behalf, if the relevant authority is satisfied after hearing the other party/parties to the deal(s) that the deal(s) is/are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade. ( b) Notwithstanding anything contained in clause (a) above, the Exchange may, to protect the interest of investors in securities and for proper regulation of the securities market, suo motu annul deal(s) at any time if the relevant authority is satisfied for reasons to be recorded in writing that such deal(s) is/are vitiated by fraud, material mistake, misrepresentation or market or price manipulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . So traders wanting to trade in large quantities had to be conscious of the possibility of matching their trades at prices substantially varying from the five best prices shown on the screen. It is not for this Tribunal to get into the issue of how prices can vary suddenly from ₹ 100 to ₹ 10 or even ₹ 1 within a fraction of a second except restating that the automated trading system of a highly liquid options market is so complex and fast changes in prices based on various factors are expected in milliseconds or even microseconds. In a liquid market, the market moves even within the time when an order is placed and a huge order itself will move prices are known to all experienced traders like the appellant. 13. Reliance placed by the appellant in the order of this Tribunal in Emkay (Supra) is distinguishable since admittedly the NIFTY Index itself moved substantially in the matter of Emkay while in the matter before us the NIFTY did not move at all, a point emphasised by the appellant. Moreover, in Emkay (Supra) it was evident from the facts that the counter parties therein had entered orders violating position limit and margin rules. Coupled with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for NIFTY put Options ₹ 6000 and between ₹ 0.05 to ₹ 687.45 for NIFTY call Options ₹ 5700. When a methodology was known to the market participants and as per the methodology price range was set we cannot interfere with such a system in arbitrarily deciding what should be far away prices from the intrinsic value. There were 101 counter parties who all were aware of the applicable price ranges and placed orders at different prices. 16. We also note that bye-law 5 of the Exchange NSE is essentially about upholding the sanctity of trade since it is on inviolability of trade . Accordingly, we agree with the contention that annulment of trade should be resorted to only in extreme cases as specified under this bye-law. Considering all the factors in the present matter, we do not agree with the contention of the appellant that it was a material mistake from the side of the trader / dealers of the appellant and, therefore, we do not agree that the impugned trades are liable to be annulled. 17. However, we note that the Exchange was not very clear when they issued advisories to the trading members that they should not be placing order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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