According to reports, only a few brokers account for a majority of the volume registered on USE. More important, Gurgaon-based Jaypee Capital, also a shareholder in USE, accounts for nearly 80 per cent of the turnover. USE currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India (Sebi). It is also one of the only two stock exchanges in the country to offer currency options in the dollar-rupee pair.
“This puts a big question mark on the surveillance mechanism, as there should have been alerts thrown up by the system and the exchange should have taken note of it," said an official familiar with the development. "Questions have been raised as this is something the regulator is not comfortable with. It is against the spirit of the law."
Sebi has clearly said on numerous occasions that concentration of positions with a single member will not be entertained and exchanges should have robust surveillance and risk mechanism measures to monitor such developments.
The regulator has also directed exchanges to put in place systems to monitor "position concentration, open interest across trading members... alerts on large traded quantity." Further, "exchanges were also advised to suitably warn their members against self trades," in a surveillance meet held in December 2008.
Jaypee Capital is a direct shareholder in USE. Gaurav Arora, managing director and founder of the brokerage entity, and his son, Saurav Arora, hold another one per cent each. USE chief executive officer and managing director, T S Nayaranaswami, could not be reached for comments, despite repeated attempts.
"Concentration of positions with one single entity is a clear breach of FUTP (Fraudulent and Unfair Trade Practices)," says Ameet Naik of Naik, Naik & Co. "One cannot have brokers with trading rights, as that was the whole idea behind pushing for demutualisation. Then, there are also codes and ethics followed by brokers, violation of which could have serious impact," says Naik, who specialises in securities regulations.
Data shows that while Jaypee Capital accounted for nearly 80 per cent of the turnover, some of the banks (Andhra Bank, Union Bank of India, Indian Bank, Bank of India and Bank of Baroda) were responsible for a marginal share in the volume. USE’s stakeholders include the Bombay Stock Exchange, which owns 15 per cent, along with 28 banks and three corporate houses.
Last Friday, the volume on USE dropped significantly to Rs 6,514 crore after clocking a little over Rs 12,000 crore the previous day. Interestingly, MCX Stock Exchange (MCX-SX) and the National Stock Exchange registered volumes of Rs 29,992 crore and Rs 35,393 crore, respectively. On Monday, USE registered a turnover of Rs 8,038 crore, while MCX-SX and NSE clocked volumes of Rs 26,616 crore and Rs 19,067 crore. USE’s first-day turnover had surpassed the combined currency segment of NSE and MCX-SX. The exchange had made a big-bang debut last year, cornering a near 52 per cent market share in the currency derivatives segment. Jaypee and Union Bank, incidentally, conducted the first trade on the exchange.