The Securities and Exchange Board of India (SEBI) has barred a Mauritius-based unit of JPMorgan Chase & Co. from the capital market over allegations of manipulating the country's newly introduced auction-based system for share price discovery.
According to an initial order published late Wednesday by SEBI board member Kamlesh Varshney, the regulator impounded 37 million rupees ($386,000) described as wrongful gains made by JPMorgan unit Copthall Mauritius Investment Ltd. and local firm Mansi Share and Stock Broking Ltd.
The order alleges that both Copthall and Mansi Share undertook manipulative trades during the closing auction window on August 13. The trades were reportedly intended to influence the indicative equilibrium price of the BSE Sensex Index to benefit the firms' options positions on the benchmark. A spokesperson for JPMorgan declined to comment on the matter, while Mansi Share did not immediately respond to an email request outside of regular business hours.
The regulatory action highlights ongoing challenges for SEBI following the introduction of the auction-based system earlier this month. The mechanism was designed to determine the closing prices of more than 200 stocks in India's $5.1 trillion stock market, aligning the country with global peers and reducing manipulation risks. However, the system has faced backlash from traders following unexplained spikes in stock benchmarks during closing sessions.
Despite the crackdown and market concerns, the regulator is expected to maintain the framework, according to Tejas Shah, head of derivatives at Equirus Securities Pvt. This viewpoint aligns with recent statements from SEBI Chairman Tuhin Kanta Pandey, who indicated that the new system is here to stay.
The 46-page order details that trading by Copthall and Mansi Share in underlying securities during the closing auction directly impacted their expiry-day Sensex options positions. The firms allegedly placed outsized orders in Sensex stocks during the closing auction, accounting for more than 90% of all orders in certain identified securities. They subsequently cancelled large portions of these orders, influencing indicative closing prices without fully executing the trades.
Varshney noted in the order that these large buy and sell orders, which were placed and later cancelled, allowed the entities to avoid losses or wrongfully profit from derivatives trades that would have otherwise expired worthless.
SEBI has requested a detailed examination of the trades by Copthall and Mansi Share to be completed expeditiously. Both entities have been given 21 days to respond to the allegations, including the option to request a personal hearing.
The implementation of the price-setting mechanism—conducted during the final 15 minutes of trading—has resulted in a chaotic start, contributing to trader concerns regarding dwindling liquidity during the auction window. Average turnover during the auction has reportedly shrunk by 40% compared to the final 15 minutes of trading under the previous regulatory regime.
"Regulatory scrutiny on algorithmic and derivatives trading highlights the challenges markets face during structural transitions. When new price-discovery mechanisms are introduced, institutional participants and regulators must navigate a steep learning curve. For the broader business and financial ecosystem, transparency and compliance remain critical to maintaining investor trust, especially as market regulators tighten oversight on trading practices during sensitive closing windows." — Dr. Shishir Gupta, Founder & CEO, StartupLanes
