Under the existing framework on annulment of trades executed on stock exchanges, dealings on an exchange are treated as inviolable and the exchange may annul trades only on grounds of fraud, willful misrepresentation or material mistake in the trade. SAT has held that negligence and execution of erroneous trades do not qualify for annulment.

SEBI, with an objective to provide transparency and uniformity in the trade annulment process, issued a circular on July 16, 2015 prescribing a policy for annulment of trades, resulting from material mistake or erroneous orders. As per the Circular, exchanges can consider annulment of trades on their own or on a stock broker’s request. Exchanges have to define suitable criteria to discourage frivolous requests and implement a framework to penalize brokers who place erroneous orders. A broker has to submit the request to the exchange within 30 minutes of the execution of the particular trade. The exchange is required to inform the details of the said request to all its brokers in a time bound manner. The exchange has to consider the potential effect of such annulment on the trades of other stock brokers/ investors across all segments and decide upon the request before the start of next trading day. The policy provides an alternate mechanism whereby exchanges can reset the price of the trade, if price reset is less disruptive than annulment of the trade. The exchange needs to convey its reasoned decision to all counter parties. The policy also allows an aggrieved party to submit a request to the stock exchange for review of the decision taken by the exchange.  Further, the Circular allows exchanges to annul trades resulting from willful misrepresentation, manipulation or fraud, as provided in their extant bye-laws.

Stock exchanges need to implement the changes within a month from the date of the Circular. The modified policy will provide more clarity on the issue of annulment of ‘fat finger trades’, i.e., trades containing a mistyped order. The famous erroneous trade entered by Emkay in 2012 (and several other prior instances) highlighted the need for a specific policy which would be fair to the one committing the error, to the counterparty to such a trade and to the market which is impacted by the price movement. While basic principles of contract law do not recognize a contract without meeting of minds, the anonymous and large secondary markets require a more nuanced approach to the problem - which will now be available. Globally most regulators or exchanges provide for such a framework.

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Date:September 29, 2015