CONTENTS

CHAPTER – I INTRODUCTION
1.1 Introduction
1.2 Stock Exchange
1.3 The BSE & NSE in India
1.4 Trading Mechanism
1.5 Settlement Cycle and Trading Hours
1.6 Market Indexes
1.7 Market Regulation
1.8 Stock Broker
1.9 Summary

CHAPTER – II METHODOLOGY

2.1 Scope of the Study

2.2 Objective of the Study
2.3 Data Source
2.4 Guidelines of SEBI for Manipulation
2.5 Limitation of the Study

CHAPTER – III STOCK ECHANGE, BROKER & SEBI PROFILE

3.1 Introduction
3.2 Registration
3.3 Manipulation of Brokers
3.4 Code of Conduct

CHAPTER – IV ANALYSIS & INTERPRETATION

4.1 Introduction
4.2 Analysis SEBI Guidelines Mechanism for Manipulation
4.3 Analysis of Penalties for Manipulation
4.4 Summary

CHAPTER – V SUGGESTIONS & CONCLUSIONS

BIBLIOGRAPHY
1.1 INTRODUCTION:
Capital Market, is used to mean the market for long term investments, that
have explicit or implicit claims to capital. Long term investments refer to
those investments whose lock-in period is greater than one year.

In the capital market, both equity and debt instruments, such as equity
shares, preference shares, debentures, zero-coupon bonds, secured premium
notes and the like are bought and sold, as well as it covers all forms of
lending and borrowing.

Capital Market is composed of those institutions and mechanisms with the

help of which medium and long term funds are combined and made available
to individuals, businesses and government. Both private placement sources
and organized market like securities exchange are included in it.

1.2 Stock Exchange

A stock exchange is a facility where stock brokers and traders can buy and sell securities,
such as shares of stock and bonds and other financial instruments. Stock exchanges may also
provide for facilities the issue and redemption of such securities and instruments and capital
events including the payment of income and dividends. Securities traded on a stock exchange
include stock issued by listed companies, unit trusts, derivatives, pooled investment products
and bonds. Stock exchanges often function as "continuous auction" markets with buyers and
sellers consummating transactions at a central location such as the floor of the exchange.
Many stock exchanges today use electronic trading, in place of the traditional floor trading.
To be able to trade a security on a certain stock exchange, the security must be listed there.
Usually, there is a central location at least for record keeping, but trade is increasingly less
linked to a physical place, as modern markets use electronic networks, which give them
advantages of increased speed and reduced cost of transactions. Trade on an exchange is
restricted to brokers who are members of the exchange. In recent years, various other trading
venues, such as electronic communication networks, alternative trading systems and "dark
pools" have taken much of the trading activity away from traditional stock exchanges.
Initial public offerings of stocks and bonds to investors is done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets are driven by
various factors that, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no obligation for stock to be issued through the stock exchange itself, nor
must stock be subsequently traded on an exchange. Such trading may be off
exchange or over-the-counter. This is the usual way that derivatives and bonds are traded.
Increasingly, stock exchanges are part of a global securities market. Stock exchanges also
serve an economic function in providing liquidity to shareholders in providing an efficient
means of disposing of shares.
FUNCTIONS OF STOCK EXCHANGE
1.Determination of Fair price
Stock exchanges help to discover fair prices for securities traded on them. Continuous trading
activity in stocks and debentures helps in ascertaining price of securities.
2. Industrial financing
Industrial development of a country depends on the availability of capital. Stock
exchanges provide the required capital for investment in industries. Industries are assured
of long term capital essential for industrial and economic development.
3. Regulation of the corporate sector
Every listed company in a stock exchange has to file documents in the stock exchange such
as annual returns, and provide information regarding plans to merge with or acquire other
companies, change in management, plans to enter into new businesses. This enables investors
to plan their future investment based on information provided by the companies to the stock
exchange.

4. Optimum resource allocation

Stock exchanges enable optimum allocation of scare capital resources. Capital is the life
blood of all businesses. Stock exchanges aid in the allocation of capital to companies which
are performing well and have potential for profitable growth in the future.

5. Investor education
Stock exchanges provide vital information to the investors in their web sites, advertise in
newspapers and business magazines regarding the do’s and don’ts in investing and encourage
conduct of investor awareness programmes. This enables investors both in the urban as well
in rural areas to become aware of stock market investment and make prudent investment
decisions.
6. Mobilization of savings
Stock exchanges play an important role in mobilizing savings of individuals and institutions.
Savings so mobilized can be utilized to invest in various projects boosting industrial
and economic development of a country.
7. Protection of investors
Companies which are listed in the stock exchanges have to comply with various rules and
regulations. They have to submit various documents and returns and provide information
regarding any important activity they plan to undertake. Stock exchanges have formulated
regulations to ensure safety of investors’ funds.
8. New venture creation
Stock exchanges enable creation of new ventures. Any new venture requires financing. Stock
exchanges are an important avenue for new ventures to raise capital for meeting their capital
needs. The stock exchange has aided new venture creation by enabling promoters to raise the
required funds.

9.Meeting financial needs of government

The government requires funds to undertake various projects and government companies
need funds for expansion, diversification etc. The Central and State governments, municipal
corporations, state financial corporations etc have raised crores through the issue of shares,
bonds etc.

10. Liquidity
Stock exchanges provide liquidity to investments made by investors. They serve as a platform
where buyers and sellers of securities come into contact to buy and sell securities. Therefore,
any person who owns a security can sell his security in a stock exchange and convert into
cash.

11. Facilitate transfer of ownership

Stock exchanges facilitate transfer of ownership of stocks, shares and securities. Securities
are regularly traded on stock exchanges which help both the buyers and sellers of securities.

12. Opportunity to create wealth

Stock exchanges enable public to share in the wealth created by the corporate sector. They
help investors who are spread across the length and breadth to purchase securities issued by
companies. Dividends, bonus shares and benefit of increase in share prices are enjoyed by
investors.
13. Industrial development
Industrial development depends on the availability of funds for investment. Stock exchanges
enable organizations to issue various types of securities according to their requirements and
raise the necessary funds. Thus they aid in the economic development of a country.

14. Attracting foreign investment

Stock exchanges aid in attracting foreign investment. They enable foreign institutional
investors (mutual funds, pension funds, hedge funds, corporate of other countries) to invest in
securities of Indian companies. Thus they provide an opportunity to companies to attract
foreign investment.
15. Reduced dependence on debt
Stock exchanges provide opportunity to companies to raise ownership capital. They enable
organizations to reduce their dependence on debt.

16. Serves as an economic barometer

Stock exchange indexes act as an economic barometer of an economy. By looking at the
index one can judge the health of the corporate sector. The index is now at around 10,000
points which reflects the healthy trend prevailing in the economy.

17. Aid valuation of corporate

During mergers, acquisitions and takeovers, valuation of companies presents a challenge.
Since securities of corporate are traded on a stock exchange and quotations of share prices are
made available by the stock exchange, valuation of companies becomes easier.
18. Facilitates expansion and diversification
Stock exchanges facilitate expansion and diversification of organizations. They aid
organizations in issuing securities to tap the savings of investors. Funds so collected can be
utilized for expansion and diversification activities.

19. Motivates better performance

Share prices of companies are influenced by their performance. Companies which report
better performance on a sustained basis, find their share prices increasing, whereas companies
which are not performing well find their share prices declining. Since share prices are in the
public domain and investors keep monitoring prices of securities, it serves as a motivation to
companies to improve their performance.

ROLE OF STOCK EXCHANGE

 Raising capital for businesses

Exchanges help companies to capitalize by selling shares to the investing public.
 Mobilizing savings for investment
They help public to mobilize their savings to invest in high yielding economic sectors,
which results in higher yield, both to the individual and to the national economy.
 Facilitating company growth
They help companies to expand and grow by acquisition or fusion.
 Profit sharing
They help both casual and professional stock investors, to get their share in the wealth of
profitable businesses.
 Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies
have better management records than privately held companies.
 Creating investment opportunities for small investors
Small investors can also participate in the growth of large companies, by buying a small
number of shares.
 Government capital raising for development projects
 They help government to rise fund for developmental activities through the issue of bonds.
An investor who buys them will be lending money to the government, which is more
secure, and sometimes enjoys tax benefits also.
 Barometer of the economy
They maintain the stock indexes which are the indicators of the general trend in the
economy. They also regulate the stock price fluctuations.

1.3 THE BSE and NSE in India

Most of the trading in the Indian stock market takes place on its two stock exchanges:
the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has
been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started
trading in 1994. However, both exchanges follow the same trading mechanism, trading hours,
settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the
rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms
constitute more than 90% of its market capitalization; the rest of the crowd consists of
highly illiquid shares.

Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a
dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a
complete monopoly in derivatives trading, with about a 98% share in this market, also as of
2009. Both exchanges compete for the order flow that leads to reduced costs, market
efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock
exchanges within a very tight range. To learn more, see The Birth of Stock Exchanges.

1.4 Mechanism of trading

Now we will be dealing on the trading platforms or the software used for trading. In order to
induce more transparency and efficiency in the trading system, NSE and BSE introduced
nationwide online fully automated “Screen Based Trading System”. The trading platform used by
BSE is called BOLT-Bombay Online Trading. The order of investors is placed on the basis of
time and price basis.
Recently BSE has launched new software for trading called BEST (BSE Electronic Smart
Trader). It can be downloaded directly from Android play store and an investor can enjoy zero
transaction charges for 6 months on cross currency derivatives.
Now we will be moving into the trading Process
STEP 1: Finding a Broker
A broker acts as an intermediary or a mediator between the investor and the stock exchange.
The work of a broker is transfer of order electronically from the investor to the exchange. Any
transaction that occurs in stock market is taken care by the stock exchange. Normally in India the
stock exchange for trading is active from 9:15 AM to 3:30 PM. However, from 1st October, 2018
SEBI has decided to extend the trading hours till 11:55 pm in a move to attract the investors
dealing in Indian products on overseas exchanges. The brokers should be selected on the
following basis:

 Watching out for fees taken for opening an online trading account
 Having a proper look at ratings and customer service.
 Brokerage charge for intraday trading
 Brokerage charge on selling a long held share
 Margin provided by the broker on intraday trading
 The broker must provide information regarding investment opportunities on a regular
basis.

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STEP 2: Opening Account with the Broker

Having selected a broker, it is time to open an online trading account with the broker. A broker
always opens a trading account in the name of the investor/ client only if he/she is satisfied about
the credit worthiness of the client. If the broker feels satisfied with the client, he/she will open the
account by writing the client’s name in the broker’s book. The minimum requirement for opening
a trading account is PAN card, and bank account failing to which the account cannot be opened.
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STEP 3: Placing the Order

After the account is opened successfully a notification will be provided via email or message.
Then the investor can begin the trading as per his/her wish. The trading or investment is done by
purchasing a specified number of shares of a particular company. The order when placed is
incomplete until the order status shows complete. Different online trading platforms follow
different symbols to mark the order placing. Order can also be placed via a telephonic call with
the broker. There are different types of orders:
Buy Orders
Buy orders are placed when the price of the share is expected to rise. This can be understood by
simple Demand-Supply curve. As the demand increases people buy more and the price
gradually rises. The same logic applies in the share market. As the price of the share rises, the
investors feel the price will further rise and they buy the shares. However, the amount of quantity
is fully dependent on the availability of funds and risk associated with the particular share.

Sell orders
Sell orders are executed when the investor feels that the price of the share will decline from now
on. However, it is totally based on analysis and predictions.

Limit order
It is an order for buying or selling of securities at a particular price as set by the investor.
However, there is no guarantee that the limit order will be executed. For example, the price of a
Share X is Rs. 234.65 and the investor places an order to buy the share X 100 quantity at Rs.
223.05 or less. But if the price of share X doesn’t fall till Rs. 223.05 then the investor cannot buy
the shares.

Stop Loss order

It is an order to sell the shares as soon as the price of the share falls up to a particular level or
from the buy side to buy the share when the price rises up to a specified level. This is set by the
client to avert the loss which can occur in share market. This is done to not suffer loss more than
the specified limit.
Let us take an example:
Buy Price: Rs. 234.95, Quantity: 300, Sell Price: Rs. 295.05, Stop Loss: Rs. 220.50,
Suppose the stock price falls to 220.50 and when the share will reach Rs. 220.50 the order will
be sold and the loss amount will be (234.95- 220.50) *300 =Rs. 4335. However if the Stop loss
has not been kept and the price falls to Rs. 205.75 then the loss would have been (234.95-
205.75) *300 = Rs. 8760.

STEP 4: Execution of the Order

The orders are executed by the broker on behalf of the clients. The buy orders must tally the sell
orders if not then the broker will sell/buy to match the order. For this the broker charges an
amount. Normally in an electronic platform the execution occurs automatically.

STEP5: Preparation of Contract Notes

A contract note is a written agreement between the broker and the investor for smooth execution
of the transaction. A contract note is sent through an automated message and via mail through
the registered phone and mail respectively by the end of the day. However, it varies from broker
to broker and the timing varies.
A contract contains the transaction name, brokerage charges, trading on BSE/ NSE, SEBI
registration number of the broker, settlement number and a digital signature by the broker.

STEP 6: Contract Settlement

The settlement is done by the clearing agency which functions in each stock exchange. The
clearing agency delivers the share certificates by the end of the day.

Flowchart of Trading
Trading Cycle Process
1.5 Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place
on Monday gets settled by Wednesday. All trading on stock exchanges takes place between
9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday.
Delivery of shares must be made in dematerialized form, and each exchange has its
own clearing house, which assumes all settlement risk, by serving as a central counterparty.

1.6 Market Indexes

The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market
index for equities; it includes shares of 30 firms listed on the BSE, which represent about
45% of the index's free-float market capitalization. It was created in 1986 and provides time
series data from April 1979, onward.

Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which
represent about 62% of its free-float market capitalization. It was created in 1996 and
provides time series data from July 1990, onward. (To learn more about Indian stock
exchanges please go to http://www.bseindia.com/ and http://www.nse-india.com/.)

1.7 Market Regulation

The overall responsibility of development, regulation and supervision of the stock market
rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an
independent authority. Since then, SEBI has consistently tried to lay down market rules in
line with the best market practices. It enjoys vast powers of imposing penalties on market
participants, in case of a breach. (For more insight, see http://www.sebi.gov.in/.)

1.8 Stock Broker

A stockbroker or share broker is a regulated professional individual, usually associated with

a brokerage firm or broker-dealer, who buys and sells stocks and other securities for
both retail and institutional clients through a stock exchange or over the counter in return for
a fee or commission. Stockbrokers are known by numerous professional designations,
depending on the license they hold, the type of securities they sell, or the services they
provide. In the United States, a stockbroker must pass both the Series 7 and either the Series
63 or the Series 66 exams in order to be properly licensed.

1.9 Summary

Trading at both the exchanges takes place through an open electronic limit order book, in
which order matching is done by the trading computer. There are no market
makers or specialists and the entire process is order-driven, which means that market
orders placed by investors are automatically matched with the best limit orders. As a result,
buyers and sellers remain anonymous. The advantage of an order driven market is that it
brings more transparency, by displaying all buy and sell orders in the trading system.
However, in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which
provide online trading facility to retail customers. Institutional investors can also take
advantage of the direct market access (DMA) option, in which they use trading terminals
provided by brokers for placing orders directly into the stock market trading system. (For
more, read Brokers And Online Trading: Accounts And Orders.)
 METHODOLOGY
2.1 Scope of the Study
2.2 Objective of the Study
2.3 Data Source
2.4 Guidelines of SEBI for Manipulation
2.5 Limitation of the Study
2.1 Scope of the Study
The scope of the study limited on trading manipulation by the stock brokers out of vast
area of securities market in India. The Securities Exchange Board of India(SEBI) who is the
regulatory framework for stock exchange, stock brokers, investors etc., provides guidelines
for trading and protection of the investors. The Present study analysis what guidelines
provides for manipulation of trading.
2.2 Objective of the Study
1. To analysis guidelines mechanism by SEBI for manipulation in Trading.
2. To analysis Code of Conduct for Brokers
3. To see Regulations and Restriction for Investor’s protection.
2.3 Data Source
The present study collected all data for project form the websites of Bombay Stock
Exchange and National Stock Exchange in India. All data collected for project in
secondary in nature.
2.4 Period of the Study
The scholar wants to see that what guidelines should be provided by the SEBI for
manipulation of Trading done by the register members of the stock exchange. The
above guidelines should work or not and investors are protecting from it or not. The
Study covers for the period from 2014 to 2017 i.e. three years’ continuous study.
2.5 Guidelines of SEBI for Manipulation

1. In our periodic review of enforcement actions by the Securities Exchange Commission

(SEC), we saw one that caught our attention concerning market manipulation, broker
bribery, and matched trades that caught our attention. Back in July the SEC charged a
Company, its CEO, and Stock Promoter with Market Manipulation, and a Stock Broker
Bribery scheme involving matched trades. This is a form of criminal activity that plagues
illiquid securities in the market and strikes at the very heart of the integrity of how the
market operates.
2. This is also a very simple form of a scheme where the criminals basically are able to find
a broker they can bribe at a brokerage firm where they can ensure the trade execution is
directed the firm where they are selling. Here are how these schemes basically work.
3. In the first part of these sort of schemes an unscrupulous group gains control of a micro
or small cap company and are able to gain control of a very substantial portion of the free
trading shares, and in the process they work to ensure that no else is able to get any of
their shares unrestricted or deposited into their brokerage accounts. Once these
individuals are confident that they control the majority of the shares deposited in
brokerage accounts they move onto the second phase of the scheme.
4. In the second phase of these schemes, the unscrupulous individuals then find a broker,
or brokers, who they can bribe to buy shares in their company. The broker then gets
paid a percentage of the value of the shares purchased. While this sounds relatively
simple, it is slightly more complicated than it sounds. Finding the broker that can be
bribed is probably the hardest part. As trade execution has turned into a commodity
item, and commissions have shrunk as a result, there are a lot of struggling brokers out
there who are desperate for cash; however, what it really takes is a broker who is either
extremely desperate for cash of who has no morals. It generally helps if the broker is
both, desperate and without morals. In addition to finding a broker who meets this
criteria, the broker needs to be at a brokerage firm that is a smaller firm where the broker
can convince the trader at the firm to execute the trade with the firm where the
unscrupulous individuals are selling their shares.
 5. In the third phase of these schemes, the broker then recommends shares of the
company controlled by the unscrupulous individuals to his or her clients. After the clients
of the broker agree to purchase shares in the company being controlled by these
unscrupulous individuals, the broker then gets the trader at the firm to buy the shares
from the brokerage firm where the unscrupulous individuals are selling their
shares. Basically the money of the clients of these brokers is transferred to these
individuals who are selling shares.
6. Finally, in the fourth phase of these schemes, after the trades settle, the seller of the
shares then pays the broker an agreed upon percentage of the value of the trade. This is
usually anywhere from 25-50%. In the old days, the seller would pay the broker in cash
delivered in a brown paper bag; and as a result these would be known as “brown bag
deals.” Now days there is a tendency for the sellers to pay the brokers with wire
transfers; which is more than just a little stupid considering how easily wire transfers can
be traced by the Feds.
7. These are horrible and rotten schemes of market manipulation that need to be
aggressively pursued by not only the SEC, but the Department of Justice as well. Broker
bribery strikes at the heart of the integrity of the market, and damages it to the core. If a
client cannot trust his or her broker, then there will never be any faith in the
market. Generally, the companies involved are nothing more than shells or development
stage companies with little or no revenues; and usually after the sellers have finished
selling all of their shares the price of the stock collapses, inflicting huge losses on the
clients of the brokers who participated in the scheme.
8. For their part, the participants in the scheme referenced below found themselves charged
with violations of Section 9(a)(1) of the Exchange Act of 1934, and Section 17(a)(1) and
(a)(3) of the Securities Act of 1933, as well Violations of Section l O (b) of the Exchange
Act and Rule lOb-5(a) and (c).
9. Section 9 of the Exchange Act of 1934 concerns market manipulation, and Section
9(a)(1) deals with creating false and misleading appearances with respect to the market
for any security. This is mainly through the prohibition of wash trades and matched
trades. Wash trades are those where there is no change in the underlying ownership of
a security. Matched trades are orders for the sale or purchase of any such security
where a corresponding order of substantially the same size, at substantially the same
time, and at substantially the same price, for the execution of the other side has been or
will be entered by or for the same or different parties. In the scheme described above,
the parties are engaging in matched traded in order to ensure that the only shares being
bought are those of the unscrupulous sellers.

2.6 Limitation of the Study

The study analysis all data in secondary in nature and that should be collected from
NSE and BSE websites. The study depends on reliable guidelines of SEBI for
malpractices happened by the Brokers of the Stock Exchange.
STOCK ECHANGE, BROKER & SEBI PROFILE

3.1 Introduction
3.2 Broker’s Registration
3.3 Manipulation of Brokers
3.4 Code of Conduct
 3.1 Introduction
Before we start, it is imperative to understand the difference between a stock market and
a stock exchange. A stock market is the market where the trading of a company’s stock
– both listed and unlisted securities takes place. So, Indian stock market includes all the
stock exchanges across the nation and all transactions that take place off-exchange as
well. Whereas a stock exchange is an organized marketplace where the members
meet (physically or otherwise) to trade company stock or other listed securities. The
members could be agents acting on behalf of their clients or could be principals
representing their own accounts. Therefore, when one talks about a “stock market
bubble” or says that “the stock market is bullish”, one is speaking not about a particular
stock exchange but of sentiments across all the exchanges that make up the stock
market.

The onset of Indian stock market can be traced back to late 18th century when East
India Company started to transact loan securities. By the time 1830s rolled in, trading in
stocks of bank and cotton presses had started in Bombay. Principals participated in the
market, and there were no more than half a dozen brokers till 1850. In mid-1950s, an
informal group of 22 stock brokers started meeting under a banyan tree – that still
stands at Horniman Circle Park, Mumbai – and started trading with an initial investment
of Re. 1 per broker. The stock market flourished as the American Civil War broke out in
1861 disrupting the supply of cotton from the Americas to Europe. By the end of the
war, the market had at least 250 brokers participating. These brokers organized
themselves in an informal group called The Native Share and Stockbrokers Association.
This group was formally organized as Bombay Stock Exchange (BSE) in 1875. In 1930,
BSE finally moved to the now-iconic BSE building on Dalal Street.

Around the same time, the procedures and conventions for stock trade at BSE were first
codified under the leadership of Premchand Roychand. It must come as no surprise that
the stock broking firms of the time were all family run affairs including a few that are still
going strong and are named after their founders. Among them are:

 D.S. Prabhudas & Company (now known as DSP, a joint venture partner with Merrill
Lynch)
 Jamnadas Morarjee (now known as JM)
 Champaklal Devidas (now called Cifco Finance)
 Brijmohan Laxminarayan

In 1956, the government of India recognized BSE as the first national stock exchange
under the Securities Contracts (Regulation) Act.

In 1992, BSE was rocked by a major scandal. A BSE member, Harshad Mehta, was
caught illegally manipulating the market. This resulted in calls for reforms from all market
stakeholders. BSE was slow to respond to these calls and the government of India
encouraged the creation of a rival stock exchange called the National Stock Exchange
(NSE). NSE started trading on 4 November, 1994 and within a year its turnover was
higher than BSE’s. The electronic stock market the NSE introduced caused a paradigm
shift in the Indian stock market. BSE quickly followed suit, but was never able to catch
up with NSE in overall turnover. In 1996, NSE was ready to launch equity derivative
trading as well, but BSE with the help of a sympathetic SEBI chairman in D. R. Mehta
was able to block the move for the time being. In the same year, NSE joined hands with
Industrial Development Bank of India Limited (IDBL) and Unit Trust of India to
form National Securities Depository Limited as India’s first electronic securities
depository on 8th of November and ushered in the age of online trading.
 3.2 Broker’s Registration
The new norms would do away with the current system that require stock
brokers to get separate registration certificates from the Securities and
Exchange Board of India (Sebi) for every market segment they trade in, like
equity, equity derivatives and currency derivatives.

"The existing practice of obtaining multiple registrations for operating in different

segments of a stock exchange/clearing corporation has been done away with
and instead a single registration per stock exchange/clearing corporation shall
be required," Sebi said in a circular.

"For operating in multiple segments, approval will be required from the stock
exchange or clearing corporation," it added.

At present, separate registrations are also needed for each category like trading
member, trading-cum self-clearing member and a professional clearing
member.

Issuing the new guidelines, Sebi said that a new entity seeking to register as a
stock broker in any segment(s) of a stock exchange, then it is require to apply
to the regulator through the respective exchange in the manner prescribed by
Sebi in any one segment.The entity would be issued a certificate with a unique
registration number for each bourse irrespective of number of segments.

In a case, where an entity is already registered with Sebi in any

segment of the exchange, then for operating in another platform of
that exchange, the entity does not require to apply with the
regulator instead can approach the concerned bourse for approval.

The exchange would grant approval for any additional segment to

the stock broker, self-clearing member or clearing member, as the
case may be, after exercising due diligence and on being satisfied
about the compliance of all relevant eligibility requirements.

Also, the exchange needs to ensure that applicant, its directors,

proprietor, partners and associates satisfy 'Fit and Proper Criteria'
set by Sebi and whether any past actions had been initiated against
them. The bourse may carry out inspection about the applicant,
wherever considered appropriate.

The exchange has to see whether the applicant has taken

corrective steps to rectify the irregularities observed in the past.
They also need to recover all pending dues.
Who is a "Broker"
Section 3(a)(4)(A) of the Act generally defines a "broker" broadly as any person engaged in the business of
effecting transactions in securities for the account of others.
Sometimes you can easily determine if someone is a broker. For instance, a person who executes transactions
for others on a securities exchange clearly is a broker. However, other situations are less clear. For example,
each of the following individuals and businesses may need to register as a broker, depending on a number of
factors:
 "finders," "business brokers," and other individuals or entities that engage in the following activities:
o Finding investors or customers for, making referrals to, or splitting commissions with registered broker-
dealers, investment companies (or mutual funds, including hedge funds) or other securities
intermediaries;
o Finding investment banking clients for registered broker-dealers;
o Finding investors for "issuers" (entities issuing securities), even in a "consultant" capacity;
o Engaging in, or finding investors for, venture capital or "angel" financings, including private placements;
o Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where
securities are involved);
 investment advisers and financial consultants;
 foreign broker-dealers that cannot rely on Rule 15a-6 under the Act (discussed below);
 persons that operate or control electronic or other platforms to trade securities;
 persons that market real-estate investment interests, such as tenancy-in-common interests, that are securities;
 persons that act as "placement agents" for private placements of securities;
 persons that market or effect transactions in insurance products that are securities, such as variable annuities,
or other investment products that are securities;
 persons that effect securities transactions for the account of others for a fee, even when those other people
are friends or family members;
 persons that provide support services to registered broker-dealers; and
 persons that act as "independent contractors," but are not "associated persons" of a broker-dealer (for
information on "associated persons," see below).
In order to determine whether any of these individuals (or any other person or business) is a broker, we look at
the activities that the person or business actually performs. You can find analyses of various activities in the
decisions of federal courts and our own no-action and interpretive letters. Here are some of the questions that
you should ask to determine whether you are acting as a broker:
 Do you participate in important parts of a securities transaction, including solicitation, negotiation, or
execution of the transaction?
 Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or
size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any
other transaction-related compensation?
 Are you otherwise engaged in the business of effecting or facilitating securities transactions?
 Do you handle the securities or funds of others in connection with securities transactions?
A "yes" answer to any of these questions indicates that you may need to register as a broker.

Who is a "Dealer"
Unlike a broker, who acts as agent, a dealer acts as principal. Section 3(a)(5)(A) of the Act generally defines a
"dealer" as:
any person engaged in the business of buying and selling securities for his own account, through a broker or
otherwise.
The definition of "dealer" does not include a "trader," that is, a person who buys and sells securities for his or
her own account, either individually or in a fiduciary capacity, but not as part of a regular business. Individuals
who buy and sell securities for themselves generally are considered traders and not dealers.
Sometimes you can easily tell if someone is a dealer. For example, a firm that advertises publicly that it makes a
market in securities is obviously a dealer. Other situations can be less clear. For instance, each of the following
individuals and businesses may need to register as a dealer, depending on a number of factors:
 a person who holds himself out as being willing to buy and sell a particular security on a continuous basis;
 a person who runs a matched book of repurchase agreements; or
 a person who issues or originates securities that he also buys and sells.
Here are some of the questions you should ask to determine whether you are acting as a dealer:
 Do you advertise or otherwise let others know that you are in the business of buying and selling securities?
 Do you do business with the public (either retail or institutional)?
 Do you make a market in, or quote prices for both purchases and sales of, one or more securities?
 Do you participate in a "selling group" or otherwise underwrite securities?
 Do you provide services to investors, such as handling money and securities, extending credit, or giving
investment advice?
 Do you write derivatives contracts that are securities?
A "yes" answer to any of these questions indicates that you may need to register as a dealer.

Brokers and Dealers Generally Must Register with the SEC

Section 15(a)(1) of the Act generally makes it unlawful for any broker or dealer to use the mails (or any other
means of interstate commerce, such as the telephone, facsimiles, or the Internet) to "effect any transactions in, or
to induce or attempt to induce the purchase or sale of, any security" unless that broker or dealer is registered
with the Commission in accordance with Section 15(b) of the Act. There are a few exceptions to this general
rule that we discuss below. In addition, we discuss the special registration requirements that apply to broker-
dealers of government and municipal securities, including repurchase agreements, below.
1. "Associated Persons" of a Broker-Dealer
We call individuals who work for a registered broker-dealer "associated persons." This is the case whether such
individuals are employees, independent contractors, or are otherwise working with a broker-dealer. These
individuals may also be called "stock brokers" or "registered representatives." Although associated persons
usually do not have to register separately with the SEC, they must be properly supervised by a currently
registered broker-dealer. They may also have to register with the self-regulatory organizations of which their
employer is a member — for example, the Financial Industry Regulatory Authority, Inc. ("FINRA") (f/k/the
National Association of Securities Dealers, Inc. ("NASD")) or a national securities exchange. To the extent that
associated persons engage in securities activities outside of the supervision of their broker-dealer, they would
have to register separately as broker-dealers. Part III, below, provides a discussion of how to register as a
broker-dealer.
We do not differentiate between employees and other associated persons for securities law purposes. Broker-
dealers must supervise the securities activities of their personnel regardless of whether they are considered
"employees" or "independent contractors" as defined under state law. See, for example, In the matter of William
V. Giordano, Securities Exchange Act Release No. 36742 (January 19, 1996).
The law also does not permit unregistered entities to receive commission income on behalf of a registered
representative. For example, associated persons cannot set up a separate entity to receive commission
checks. An unregistered entity that receives commission income in this situation must register as a broker-
dealer. See, for example, Wolff Juall Investments, LLC (May 17, 2005). Under certain circumstances,
unregistered entities may engage in payroll administration services involving broker-dealers. See, for example,
letter re: ADP TotalSource, Inc. (December 4, 2007). In those circumstances, the broker-dealer employer
generally hires and supervises all aspects of the employees' work and uses the payroll and benefits administrator
merely as a means to centralize personnel services.
2. Intrastate Broker-Dealers
A broker-dealer that conducts all of its business in one state does not have to register with the SEC. (State
registration is another matter. See Part III, below.) The exception provided for intrastate broker-dealer activity is
very narrow. To qualify, all aspects of all transactions must be done within the borders of one state. This means
that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national
securities exchange.
A broker-dealer that otherwise meets the requirements of the intrastate broker-dealer exemption would not cease
to qualify for the intrastate broker-dealer exemption solely because it has a website that may be viewed by out-
of-state persons, so long as the broker-dealer takes measures reasonably designed to ensure that its business
remains exclusively intrastate. These measures could include the use of disclaimers clearly indicating that the
broker-dealer's business is exclusively intrastate and that the broker-dealer can only act for or with, and provide
broker-dealer services to, a person in its state, as long as the broker-dealer does not provide broker-dealer
services to persons that indicate they are, or that the broker-dealer has reason to believe are, not within the
broker-dealer's state of residence.
These measures are not intended to be exclusive. A broker-dealer could adopt other measures reasonably
designed to ensure that it does not provide broker-dealer services to persons that are not within the same state as
the broker-dealer. However, an intermediary's business would not be "exclusively intrastate" if it sold securities
or provided any other broker-dealer services to a person that indicates that it is, or that the broker-dealer has
reason to believe is, not within the broker-dealer's state of residence.
Broker-Dealers that Limit their Business to Excluded and Exempted Securities
A broker-dealer that transacts business only in commercial paper, bankers' acceptances, and commercial bills
does not need to register with the SEC under Section 15(b) or any other section of the Act. On the other hand,
persons transacting business only in certain "exempted securities," as defined in Section 3(a)(12) of the Act, do
not have to register under Section 15(b), but may have to register under other provisions of the Act. For
example, some broker-dealers of government securities, which are "exempted securities," must register as
government securities brokers or dealers under Section 15C of the Act, as described in Part II.E, below.
Broker-Dealers Must Register Before Selling Unregistered Securities – Including Private
Placements (or Regulation D offerings)
A security sold in a transaction that is exempt from registration under the Securities Act of 1933 (the "1933
Act") is not necessarily an "exempted security" under the Exchange Act. For example, a person who sells
securities that are exempt from registration under Regulation D of the 1933 Act must nevertheless
register as a broker-dealer. In other words, "placement agents" are not exempt from broker-dealer registration.
Issuer's "Exemption" and Associated Persons of Issuers (Rule 3a4-1)
Issuers generally are not "brokers" because they sell securities for their own accounts and not for the accounts of
others. Moreover, issuers generally are not "dealers" because they do not buy and sell their securities for their
own accounts as part of a regular business. Issuers whose activities go beyond selling their own securities,
however, need to consider whether they would need to register as broker-dealers. This includes issuers that
purchase their securities from investors, as well as issuers that effectively operate markets in their own securities
or in securities whose features or terms can change or be altered. The so-called issuer's exemption does not
apply to the personnel of a company who routinely engage in the business of effecting securities transactions for
the company or related companies (such as general partners seeking investors in limited partnerships). The
employees and other related persons of an issuer who assist in selling its securities may be "brokers," especially
if they are paid for selling these securities and have few other duties.
Exchange Act Rule 3a4-1 provides that an associated person (or employee) of an issuer who participates in the
sale of the issuer's securities would not have to register as a broker-dealer if that person, at the time of
participation: (1) is not subject to a "statutory disqualification," as defined in Section 3(a)(39) of the Act; (2) is
not compensated by payment of commissions or other remuneration based directly or indirectly on securities
transactions; (3) is not an associated person of a broker or dealer; and (4) limits its sales activities as set forth in
the rule.
Some issuers offer dividend reinvestment and stock purchase programs. Under certain conditions, an issuer may
purchase and sell its own securities through a dividend reinvestment or stock purchase program without
registering as a broker-dealer. These conditions, regarding solicitation, fees and expenses, and handling of
participants' funds and securities, are explained in Securities Exchange Act Release No. 35041 (December 1,
1994), 59 FR 63393 ("1994 STA Letter"). Although Regulation M 2 replaced Rule 10b-6 and superseded the
1994 STA Letter, the staff positions taken in this letter regarding the application of Section 15(a) of the
Exchange Act remain in effect. See 17 CFR 242.102(c) and Securities Exchange Act Release No. 38067
(December 20, 1996), 62 FR 520, 532 n.100 (January 3, 1997).
Foreign Broker-Dealer Exemption (Rule 15a-6)
The SEC generally uses a territorial approach in applying registration requirements to the international
operations of broker-dealers. Under this approach, all broker-dealers physically operating within the United
States that induce or attempt to induce securities transactions must register with the SEC, even if their activities
are directed only to foreign investors outside of the United States. In addition, foreign broker-dealers that, from
outside of the United States, induce or attempt to induce securities transactions by any person in the United
States, or that use the means or instrumentalities of interstate commerce of the United States for this purpose,
also must register. This includes the use of the internet to offer securities, solicit securities transactions, or
advertise investment services to U.S. persons. See Securities Exchange Act Release No. 39779 (March 23,
1998)
Foreign broker-dealers that limit their activities to those permitted under Rule 15a-6 of the Act, however, may
be exempt from U.S. broker-dealer registration. Foreign broker-dealers that wish to rely on this exemption
should review Securities Exchange Act Release No. 27017 (effective August 15, 1989), 54 FR 30013, to
determine whether they meet the conditions of Rule 15a-6. See also letters re: Securities Activities of U.S.-
Affiliated Foreign Dealers (April 9 and April 28, 1997). In addition, in April 2005, the Division of Market
Regulation staff issued responses to frequently asked questions concerning Rule 15a-6 in relation to Regulation
AC. (Regulation AC is discussed in Part V.B, below.)
Requirements Regarding Brokers and Dealers of Government and Municipal
Securities, including Repurchase Agreements
Broker-dealers that limit their activity to government or municipal securities require specialized registration.
Those that limit their activity to government securities do not have to register as "general-purpose" broker-
dealers under Section 15(b) of the Act. General-purpose broker-dealers that conduct a government securities
business, however, must note this activity on their Form BD. (Form BD is discussed below.) All firms that are
brokers or dealers in government securities must comply with rules adopted by the Secretary of the Treasury, as
well as SEC rules.
Firms that limit their securities business to buying and selling municipal securities for their own account
(municipal securities dealers) must register as general-purpose broker-dealers. If, however, these entities are
banks or meet the requirements of the intrastate exemption discussed in Part II.D.2. above, they must register as
municipal securities dealers. Municipal securities brokers (other than banks) must register as general-purpose
broker-dealers unless they qualify for the intrastate exception. See Part II.D.2 above.
Firms that run a matched book of repurchase agreements or other stock loans are considered dealers. Because a
"book running dealer" holds itself out as willing to buy and sell securities, and is thus engaged in the business of
buying and selling securities, it must register as a broker-dealer.

HOW TO REGISTER AS A BROKER-DEALER

A broker-dealer may not begin business until:
 it has properly filed Form BD, and the SEC has granted its registration;
 it has become a member of an SRO;
 it has become a member of SIPC, the Securities Investor Protection Corporation;
 it complies with all applicable state requirements; and
 its "associated persons" have satisfied applicable qualification requirements.
A. Form BD
If a broker-dealer does not qualify for any of the exceptions or exemptions outlined in the sections above, it
must register with the Commission under Section 15(b) of the Act. Broker-dealers register by filing an
application on Form BD, which you may obtain from the SEC's webpage at or through the SEC's Publications
Office at (202) 551-4040. You also use Form BD to:
 apply for membership in an SRO, such as FINRA or a registered national securities exchange;
 give notice that you conduct government securities activities; or
 apply for broker-dealer registration with each state in which you plan to do business.
Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, and
employees. The broker-dealer must meet the statutory requirements to engage in a business that involves high
professional standards, and quite often includes the more rigorous responsibilities of a fiduciary.
To apply for registration, you must file one executed copy of Form BD through the Central Registration
Depository ("CRD"), which is operated by FINRA. (The only exception is for banks registering as municipal
securities dealers, which file Form MSD directly with the SEC and with their appropriate banking regulator.)
Form BD contains additional filing instructions. The SEC does not charge a filing fee, but the SROs and the
states may. Applicants that reside outside the U.S. must also appoint the SEC as agent for service of process
using a standard form. Incomplete applications are not considered "filed" and will be returned to the applicant
for completion and re-submission.
Within 45 days of filing a completed application, the SEC will either grant registration or begin proceedings to
determine whether it should deny registration. An SEC registration may be granted with the condition that SRO
membership must be obtained. The SROs have independent membership application procedures and are not
required to act within 45 days of the filing of a completed application. In addition, state registrations may be
required. A broker-dealer must comply with relevant state law as well as federal law and applicable SRO rules.
Timeframes for registration with individual states may differ from the federal and SRO timeframes. As such,
when deciding to register as a broker-dealer, it is important to plan for the time required for processing Federal,
state, and SRO registration or membership applications.
Duty to update Form BD. A registered broker-dealer must keep its Form BD current. Thus, it must promptly
update its Form BD by filing amendments whenever the information on file becomes inaccurate or incomplete
for any reason.
Prohibited Broker-Dealer Names. Title 18, Section 709 of the United States Code makes it a criminal
offense to use the words "National," "Federal," "United States," "Reserve," or "Deposit Insurance" in
the name of a person or organization in the brokerage business, unless otherwise allowed by federal law.
Further, a broker-dealer name that is otherwise materially misleading would become subject to scrutiny
under Exchange Act Section 10(b), and Rule 10b-5 thereunder, the general antifraud rules, and any other
applicable provisions.

3.3 Manipulation of Brokers

Market manipulation is a type of market abuse where there is a deliberate attempt to

interfere with the free and fair operation of the market and create artificial, false or
 misleading appearances with respect to the price of, or market for, a
product, security, commodity or currency.
Market manipulation is prohibited in most countries, in particular, it is prohibited in the
United States under Section 9(a)(2) of the Securities Exchange Act of 1934, in
the European Union under Article 12 of the Market Abuse Regulation, in Australia under
Section 1041A of the Corporations Act 2001, and in Israel under Section 54(a) of the
securities act of 1968. Market manipulation is also prohibited for wholesale electricity
markets under Section 222 of the Federal Power Act[3] and wholesale natural gas markets
under Section 4A of the Natural Gas Act.

Types of stock market manipulation

A. False Trading and Market Rigging (Section 197 SFA)
3. False trading and market rigging are acts where a person creates a false
impression to the volume of trades done on the securities exchange. This can be
done by placing matching orders of buys and sells, where the ultimate owner of the
securities remains the same. For example, a person can sell a certain number of
shares, and appoint his company or employees to buy back those shares. Another
method could be where two or more parties place matching buy and sell orders.

B. Market Manipulation (Section 198 SFA)

4. Market manipulation are acts where a person carries out transactions in the
securities of a corporation which have the effect of raising, decreasing or maintaining
the price of securities, with the intention to induce other persons to subscribe,
purchase or sell those securities.

C. Dissemination Of Misleading Information (Section 199 SFA)

5. These are acts where the prices of shares are affected by disseminating
favourable or unfavourable information likely to induce the subscription, sale or
purchase of shares by other people, or raise, lower or maintain the market price of
shares.

D. Fraudulently Inducing Persons to Deal in Securities (Section 200

SFA)
6. These are acts where a person publishes any statement, promise or forecast that
he knows or reasonably ought to know to be misleading, false or deceptive. They
can be by:
a. Any dishonest concealment of material facts;
b. Recklessly making or publishing of any statement, promise or forecast that is
misleading, false or deceptive; or
c. Recording or storing in, or by means of, any mechanical, electronic or other device
information that he knows to be false or misleading in a material particular, and as a
result, induces or attempts to induce, another to deal in the shares.
E. Employment of Manipulative and Deceptive Device (Section 201
SFA)
7. This section has been designed as a catch-all section to prohibit any form of stock
market manipulation that has not been dealt with in abovementioned sections. The
prohibited actions include:
a. Employing any device, scheme or artifice to defraud;
b. Engaging in any act, practice or course of business which operates as a fraud or
deception, or
c. Acts likely to operate as a fraud or deception, upon any person;
d. Making any statement the person knows to be false in a material particular; or
e. Omitting to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading.

3.4 Code of Conduct

NEW DELHI: After prescribing a new Corporate Governance Code for listed companies, capital markets
watchdog Sebi is now mulling over a new set of Prudential Governance Norms for stock brokers to safeguard
investors' interest.

The proposed norms, which are currently at draft stage and are going through consultations, would considerably
enhance the disclosure requirements by stock brokers and can subject them to tightened regulations with regard
to related party transactions and audit of their books and other dealings.

Besides, the brokers may also be required to put in place a whistle-blower mechanism and frame an effective
'code of conduct' for their directors and senior management personnel, in line with similar norms for listed
companies as prescribed by Sebi and in the new Companies Act, sources said.

These norms have been proposed by Sebi to ensure that any adverse impact on the interest on investors as well
as on the integrity of securities markets can avoided in the event of any lapses at the end of stock broker.

Sebi is aiming to "minimise/prevent occurrence of circumstances leading to default in making payments by stock
brokers to stock exchanges or clients due to lack of due diligence in their risk management system, due to mis-
management leading to instability or failure in operations of stock broker including insolvency etc" with these
norms.

The new corporate governance norms for listed companies are coming into effect from October 1. However, Sebi
recently relaxed some provisions after representations from the industry bodies and the government and it has
given time till April 1, 2015 for a key provision of having minimum one-woman director on the boards of listed
companies.

A senior official said that the brokers have also already begun making representations before the regulator with
concerns that any tightening of corporate governance norms could hurt their business due to high compliance
costs.

The brokers are arguing that they are already operating in a highly regulated business and the new Companies
Act has already provided for significant tightening of norms for the corporate brokerage firms.

Among others, the proposed norms would require brokers to submit their audited annual reports within 60 days of
end of a financial year and a half-yearly net worth certificate within two months of the end of a half-year to the
stock exchange.

The quarterly financial results would be required to be submitted within 45 days of end of each quarter, while
annual audit would need to be done by "an independent, competent and qualified auditor".
No stock broker would be allowed to re-appoint an individual as an auditor for more than one term for five
consecutive years. In case of an audit firm, it can be appointed for maximum two terms of five consecutive
terms.

In their periodic financial disclosures, the brokers would have to separately mention the advance or margins
received from their clients, as also any advance or loans given by them.

Details of loans, advances or investments in subsidiaries, associates or group companies, as also all material
information about their financial position, performance, governance and ownership, would need specific
disclosures.

The brokers would also need to disclose all exceptional income and expenditure, along with auditors'
observations, while their quarterly and annual financial results would need to be approved by the board of
director and CEO/CFO along with a certification of "abse nce of falsity or omission".

The board of directors would need to lay down a code of conduct for all board members and senior management
of the company, and also devise an effective whistle blower mechanism enabling all stakeholders, including
employees, to freely communicate their concerns about any illegal or unethical practices.

The board would have to ensure that the interest of a whistle-blower is not prejudicially affected.

With regard to investor grievance, a compliance officer would need to ensure that they are redressed in a
stipulated manner and within a given timeline. The status of all investor complaints would need to be reviewed
and analysed every six months and corrective steps would be required to be taken by the compliance officer to
"minimise recurrence in future".

The CEO of the company would need to certify that "there are no transaction entered into by the stock broker
during the year which are fraudulent, illegal or violating the stock broker's code of conduct".

The certification would also include that the auditor has been informed about any significant changes in the
internal control over financial reporting or in accounting policies, as also about the "instances of significant fraud
of which they have become aware and the involvement therein n, if any, of the management or an employee"

..

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 ANALYSIS & INTERPRETATION

4.1 Introduction

In our periodic review of enforcement actions by the Securities Exchange Commission

(SEC), we saw one that caught our attention concerning market manipulation, broker bribery,
and matched trades that caught our attention. Back in July the SEC charged a Company, its
CEO, and Stock Promoter with Market Manipulation, and a Stock Broker Bribery scheme
involving matched trades. This is a form of criminal activity that plagues illiquid securities in the
market and strikes at the very heart of the integrity of how the market operates.

4.2 Analysis SEBI Guidelines Mechanism for Manipulation

This is also a very simple form of a scheme where the criminals basically are able to find a
broker they can bribe at a brokerage firm where they can ensure the trade execution is
directed the firm where they are selling. Here are how these schemes basically work.

In the first part of these sort of schemes an unscrupulous group gains control of a micro or
small cap company and are able to gain control of a very substantial portion of the free
trading shares, and in the process they work to ensure that no else is able to get any of
their shares unrestricted or deposited into their brokerage accounts. Once these
individuals are confident that they control the majority of the shares deposited in brokerage
accounts they move onto the second phase of the scheme.

In the second phase of these schemes, the unscrupulous individuals then find a broker, or
brokers, who they can bribe to buy shares in their company. The broker then gets paid a
percentage of the value of the shares purchased. While this sounds relatively simple, it is
slightly more complicated than it sounds. Finding the broker that can be bribed is probably
the hardest part. As trade execution has turned into a commodity item, and commissions
have shrunk as a result, there are a lot of struggling brokers out there who are desperate
for cash; however, what it really takes is a broker who is either extremely desperate for
cash of who has no morals. It generally helps if the broker is both, desperate and without
morals. In addition to finding a broker who meets this criteria, the broker needs to be at a
brokerage firm that is a smaller firm where the broker can convince the trader at the firm to
execute the trade with the firm where the unscrupulous individuals are selling their shares.

In the third phase of these schemes, the broker then recommends shares of the company
controlled by the unscrupulous individuals to his or her clients. After the clients of the
broker agree to purchase shares in the company being controlled by these unscrupulous
individuals, the broker then gets the trader at the firm to buy the shares from the brokerage
firm where the unscrupulous individuals are selling their shares. Basically the money of the
clients of these brokers is transferred to these individuals who are selling shares.

Finally, in the fourth phase of these schemes, after the trades settle, the seller of the
shares then pays the broker an agreed upon percentage of the value of the trade. This is
usually anywhere from 25-50%. In the old days, the seller would pay the broker in cash
delivered in a brown paper bag; and as a result these would be known as “brown bag
deals.” Now days there is a tendency for the sellers to pay the brokers with wire transfers;
which is more than just a little stupid considering how easily wire transfers can be traced by
the Feds.

These are horrible and rotten schemes of market manipulation that need to be aggressively
pursued by not only the SEC, but the Department of Justice as well. Broker bribery strikes
at the heart of the integrity of the market, and damages it to the core. If a client cannot
trust his or her broker, then there will never be any faith in the market. Generally, the
companies involved are nothing more than shells or development stage companies with
little or no revenues; and usually after the sellers have finished selling all of their shares the
 price of the stock collapses, inflicting huge losses on the clients of the brokers who
participated in the scheme.

For their part, the participants in the scheme referenced below found themselves charged
with violations of Section 9(a)(1) of the Exchange Act of 1934, and Section 17(a)(1) and
(a)(3) of the Securities Act of 1933, as well Violations of Section l O (b) of the Exchange
Act and Rule lOb-5(a) and (c).

Section 9 of the Exchange Act of 1934 concerns market manipulation, and Section 9(a)(1)
deals with creating false and misleading appearances with respect to the market for any
security. This is mainly through the prohibition of wash trades and matched trades. Wash
trades are those where there is no change in the underlying ownership of a
security. Matched trades are orders for the sale or purchase of any such security where a
corresponding order of substantially the same size, at substantially the same time, and at
substantially the same price, for the execution of the other side has been or will be entered
by or for the same or different parties. In the scheme described above, the parties are
engaging in matched traded in order to ensure that the only shares being bought are those
of the unscrupulous sellers.

4.3 Analysis of Penalties

cases on stock market manipulation

9. In the case of Public Prosecutor v Ng Sae Kiat and Ors [2015] SGHC 191, the four
defendants faced multiple charges under Section 201(b) of the SFA. The defendants
were employed by Philip Securities Pte Ltd ("Philip Securities") as "Contract for
Differences Hedgers" and dealt in Contract for Differences ("CFDs"), which are over-
the-counter trading instruments that allows an investor to make profits on price
movements of securities listed on selected stock exchanges without having to own
them. The respondents were given discretionary powers and could act on behalf of
Philip Securities in accepting or rejecting CFD trades. The fraudulent transactions
involved buying overpriced CFDs and/or selling discounted CFDs. These trades
were transacted with nominee accounts under the names of their friends and
relatives. The defendants pleaded guilty to the charges and all four received total
fines ranging between $60,000 and $140,000 depending on factors such as the
number of charges involved, the number of transactions, and the amount of losses
caused.
10. The Prosecution appealed to the High Court, arguing for custodial sentences to
be imposed. The High Court however upheld the fines imposed by the District Court.
While the High Court stated that it was neither possible nor desirable to lay down a
bright line rule as to when the custodial threshold would be crossed in respect of a
Section 201(b) offence, they also commented that the following non-exhaustive list of
factors would be useful in ascertaining whether the custodial threshold was crossed.
a. the extent of the loss/damage caused to victim(s);
b. sophistication of the fraud;
c. the frequency and duration of the offender's unauthorised use of the relevant
account;
d. extent of distortion, if any, to the operation of the financial market
e. the identity of the defrauded party (ie, whether the defrauded party is a public
investor or a security firm);
f. relationship between the offender and the defrauded party; and
g. the offender's breach of any duty of fidelity that may be owed to the defrauded
party.
11. Apart from criminal proceedings, the Singapore authorities have also taken out
civil penalty actions against individuals. Under Section 232 of the SFA, the Monetary
Authority of Singapore may enter into agreements with any person for that person to
pay, with or without admissions of liability, a civil penalty which may be up to three
times the amount of profit gained or loss avoided by that person as a result of the
contravention.
12. In 2015, the Monetary Authority of Singapore took out a civil penalty action
against Tan Hua Ann. Tan, then a remisier with UOB Kay Hian Private Limited, had
entered a false sell order during the pre-open phase before the beginning of the
trading day. He made personal gains of $62,723 from the false trading. He was
ordered to pay MAS $157,000, without court action, and was also slapped with a
prohibition order under Section 101A(2)(a) of the SFA, prohibiting him from
conducting business in any regulated activity under the SFA or acting as a
representative in respect of any regulated activity under the SFA; and (ii) taking part
in the management of any holder of a capital market services licence or any person
exempt from holding a capital market services licence under section 99(1) of the
SFA in Singapore, for a period of two years.
4.4 Analysis of Penalties

Penalties for manipulating the stock market

8. There are both civil and criminal penalties for manipulating the stock market. Civil
penalties include:
a. a fine not exceeding $250,000 or to imprisonment for a term not exceeding 7
years or to both; or
b. payment of a civil penalty under section 232 by a court order; or
c. an agreement with the Monetary Authority of Singapore to pay, with or without
admission of liability, a civil penalty under section 232(5).

4.5 Summary
Recent cases show that the authorities will not hesitate to take criminal or civil
action against anyone who manipulates the market, even if they attempt to
argue that they are under instructions to do so or did not profit personally.
Individuals should be placed under notice not to pursue such actions under any
circumstances.

SUGGESTIONS & CONCLUSIONS

Any product sold to an investor should be suitable to him,” said one of them. “If it is not suitable, why should an
investor invest in it?” Derivatives, once described as weapons of mass destruction by investor Warren Buffett, are
considered a risky investment by some.

Sebi has come across several instances of investors taking on exposure to derivatives in excess of their declared
income or share portfolios. Investors can bet on Nifty or stock futures by making an initial deposit that’s a fraction
of the value. Gains can be steep but so can losses if bets go wrong. In theory, losses for futures traders and
options sellers are unlimited.

“Sebi is targeting manipulators, not investors,” said one of the persons, who was part of the deliberations.
Proprietary trades and individual investors contribute 43% and 26%, respectively, to the total volume of the equity
derivatives trade in India. Options dominate trading in the derivatives segment, accounting for 83.61% of the
total.

Sebi data show about 14% of individual investors who contributed about 2.5% to the total turnover of the equity
derivatives segment didn’t trade in the cash segment. More than half the derivatives trading by individuals is
contributed by those who have more than Rs 1 crore exposure in the cash market.

“Large number of individual investors are active in derivatives segment,” Sebi said in a discussion paper in July
last year. “Going by their trading pattern in cash segment, it is observed that these investors may or may not
have adequate financial capability to withstand risks posed by complex derivatives instruments. In the absence of
product suitability framework, this may not be in the interest of securities market.”

Conclusion

Recent cases show that the authorities will not hesitate to take criminal or civil action
against anyone who manipulates the market, even if they attempt to argue that they
are under instructions to do so or did not profit personally. Individuals should be
placed under notice not to pursue such actions under any circumstances. There are
both civil and criminal penalties for manipulating the stock market. Civil penalties
include: A fine not exceeding $250,000 or to imprisonment for a term not exceeding
7 years or to both; or Payment of a civil penalty under section 232 by a court order;
or an agreement with the Monetary Authority of Singapore to pay, with or without
admission of liability, a civil penalty under section 232(5).

13.
Pools
Agreements, often written, among a group of traders to delegate authority to a single manager to
trade in a specific stock for a specific period of time and then to share in the resulting profits or
losses. In Australia section 1041B prohibits pooling.

Churning
When a trader places both buy and sell orders at about the same price. The increase in activity is
intended to attract additional investors, and increase the price.

Stock bashing
This scheme is usually orchestrated by savvy online message board posters (a.k.a. "Bashers")
who make up false and/or misleading information about the target company in an attempt to get
shares for a cheaper price. This activity, in most cases, is conducted by posting libellous posts
on multiple public forums. The perpetrators sometimes work directly for unscrupulous Investor
Relations firms who have convertible notes that convert for more shares the lower the bid or ask
price is; thus the lower these Bashers can drive a stock price down by trying to convince
shareholders they have bought a worthless security, the more shares the Investor Relations firm
receives as compensation. Immediately after the stock conversion is complete and shares are
issued to the Investor Relations firm, consultant, attorney or similar party, the basher/s then
become friends of the company and move quickly to ensure they profit on a classic Pump &
Dump scheme to liquidate their ill-gotten shares. (see P&D)

Pump and dump

A pump and dump scheme is generally part of a more complex grand plan of market
manipulation on the targeted security. The Perpetrators (Usually stock promoters) convince
company affiliates and large position non-affiliates to release shares into a free trading status as
"Payment" for services for promoting the security. Instead of putting out legitimate information
about a company the promoter sends out bogus e-mails (the "Pump") to millions of
unsophisticated investors (Sometimes called "Retail Investors") in an attempt to drive the price of
the stock and volume to higher points. After they accomplish both, the promoter sells their shares
(the "Dump") and the stock price falls like a stone, taking all the duped investors' money with it.

Runs
When a group of traders create activity or rumors in order to drive the price of a security up. An
example is the Guinness share-trading fraud of the 1980s. In the US, this activity is usually
referred to as painting the tape.Runs may also occur when trader(s) are attempting to drive the
price of a certain share down, although this is rare. (see Stock Bashing)

Ramping (the market)

Actions designed to artificially raise the market price of listed securities and to give the
impression of voluminous trading, in order to make a quick profit."[7]

Wash trade
In a wash trade the manipulator sells and repurchases the same or substantially the same
security for the purpose of generating activity and increasing the price.

Bear raid
In a bear raid there is an attempting to push the price of a stock down by heavy selling or short
selling

Lure and Squeeze

This works with a company that is very distressed on paper, with impossibly high debt and
consistently high annual losses, but very few assets, making it look as if bankruptcy must be
imminent. The stock price gradually falls as people new to the stock short it on the basis of the
poor outlook for the company, until the number of shorted shares greatly exceeds the total
number of shares that are not held by those aware of the lure and squeeze scheme (call them
"people in the know"). In the meantime, people in the know increasingly purchase the stock as it
drops to lower and lower prices. When the short interest has reached a maximum, the company
announces it has made a deal with its creditors to settle its loans in exchange for shares of stock
(or some similar kind of arrangement that leverages the stock price to benefit the company),
knowing that those who have short positions will be squeezed as the price of the stock sky-
rockets. Near its peak price, people in the know start to sell, and the price gradually falls back
down again for the cycle to repeat.

Quote stuffing
Quote stuffing is made possible by high-frequency trading programs that can execute market
actions with incredible speed. However, high-frequency trading in and of itself is not illegal. The
tactic involves using specialized, high-bandwidth hardware to quickly enter and withdraw large
quantities of orders in an attempt to flood the market, thereby gaining an advantage over slower
market participants.[9]

Spoofing (finance)
Spoofing is a disruptive algorithmic trading entity employed by traders to outpace other market
participants and to manipulate commodity markets. Spoofers feign interest in trading futures,
stocks and other products in financial markets creating an illusion of exchange pessimism in the
futures market when many offers are being cancelled or withdrawn, or false optimism or demand
when many offers are being placed in bad faith. Spoofers bid or offer with intent to cancel before
the orders are filled. The flurry of activity around the buy or sell orders is intended to attract
other high-frequency traders (HFT) to induce a particular market reaction such as manipulating
the market price of a security. Spoofing can be a factor in the rise and fall of the price of shares
and can be very profitable to the spoofer who can time buying and selling based on this
manipulation.

Cornering the market

In cornering the market the manipulators buys sufficiently large amount of a commodity so they
can can control the price creating in effect a monopoly. For example the brothers Nelson Bunker
Hunt and William Herbert Hunt attempted to corner the world silver markets in the late 1970s and
early 1980s, at one stage holding the rights to more than half of the world's deliverable
silver.[10] During the Hunts' accumulation of the precious metal, silver prices rose from $11 an
ounce in September 1979 to nearly $50 an ounce in January 1980.[11] Silver prices ultimately
collapsed to below $11 an ounce two months later,[11] much of the fall occurring on a single day
now known as Silver Thursday, due to changes made to exchange rules regarding the purchase
of commodities on margin.
4.6 Introduction

4.7 Analysis SEBI Guidelines Mechanism for Manipulation