NSE seeks to know locations of F&O traders to probe 737% surge in volume
The National Stock Exchange (NSE) has initiated a significant inquiry by requesting crucial information from over 15 brokers, including prominent intermediaries. This move aims to gather information about the locations from which equity derivative orders were placed in the time frame spanning January 2020 to March 2022.
The exchange’s decision comes in light of an unusual surge in trade volumes for futures and options, as well as the rapid onboarding of new clients by numerous brokerages during the months of the Covid-19 pandemic.
To gain a comprehensive understanding of these activities, the NSE has instructed member brokers to provide specific details. These details encompass the know-your-customer (KYC) information of their clients, records of client ledgers, identification of devices utilized to place trade orders, Internet Protocol (IP) addresses, and media access control (MAC) addresses. The MAC address is a unique identifier present in all internet-ready devices, including mobile phones.
This initiative to collect detailed information stems from the NSE’s interest in comprehending the dynamics of the market during a period marked by significant volatility and market movements. The Economic Times, citing two unidentified sources familiar with the matter, reported on this development. The sources refused to be identified.
By gathering insights into the locations of trade order placements, client identification, and device usage, the NSE aims to enhance transparency and potentially uncover any unusual or suspicious trading activities that occurred during the pandemic months.
This move reflects the exchange’s commitment to ensuring the integrity and fairness of the market while addressing any concerns arising from the observed abnormal trade volume increase and client onboarding during that period.
The NSE’s initiative to gather information about the locations from which equity derivative orders were placed has prompted various speculations among industry insiders. One theory suggests that the exchange authorities are examining the possibility of sub-brokers or franchisees in remote locations accessing user IDs and passwords of unrelated investors to execute derivative trades.
This could potentially raise concerns about unauthorized access and trading activity conducted on behalf of unrelated clients. Additionally, the NSE might be investigating whether derivative orders were placed from locations outside the country, which could potentially raise questions about the legitimacy of such trades.
The surveillance department of the NSE had initially requested details, primarily related to local clients, on the matter. The surge in futures and options (F&O) trade volumes on the exchange has been remarkable, with volumes increasing by approximately 737 percent between January 2020 and March 2022.
This growth is significant, with average daily F&O volumes skyrocketing from Rs 16.75 lakh crore in January 2020 to Rs 140.25 lakh crore in March 2022. Such a substantial increase in trading activity within a relatively short time frame has raised eyebrows and prompted the NSE’s investigation into potential underlying factors.
The NSE’s effort to gather information regarding the locations of traders, client identification, and trading activities aims to ensure the market’s integrity and to address any potential irregularities or misuse of trading platforms.
By examining these aspects, the exchange seeks to maintain transparency, prevent unauthorized activities, and uphold investor confidence in the market. The surge in trade volumes during the pandemic months has led to questions about whether this growth was organic or potentially influenced by factors that warrant further investigation.
Mitil Chokshi, a senior partner at the chartered accounting and forensic firm Chokshi & Chokshi, highlighted that the NSE’s focus appears to be on high net worth clients whose futures and options (F&O) trading volumes experienced a sudden and significant increase.
This could indicate that the exchange is investigating whether certain high net worth individuals engaged in trading practices that contributed to the abnormal surge in trade volumes. Additionally, Chokshi mentioned that the exchange might also be examining the utilization of algorithmic trading strategies (algo trading) during this period.
One of the primary reasons behind the NSE’s investigation is to understand the factors that led to the extraordinary rise in trade volumes exhibited by a specific group of clients. This investigation seeks to uncover whether there were any irregularities, unauthorized activities, or other factors that contributed to this unusual trading pattern.
Another individual explained that the IP addresses associated with trade orders can provide valuable information about the geographical locations from which the orders were placed.
This information could be crucial in confirming whether trade orders were executed from multiple locations, especially during periods when movement restrictions were in place due to the pandemic. By analyzing the IP addresses, the NSE could gain insights into the locations and potentially identify any instances of orders being placed from multiple geographical regions, which could raise concerns about the legitimacy of trading activities.
In essence, the NSE’s inquiry is focused on understanding the factors behind the surge in trade volumes, especially for high net worth clients, during a period marked by significant economic and market volatility. The investigation encompasses aspects such as algo trading, geographical locations of trade orders, and potential irregularities that could have influenced the observed trading patterns.
