Explained: How a JP Morgan unit and a Mumbai-based stock broking firm allegedly manipulated Sensex during CAS

Everything seemed normal on Dalal Street as the stock market opened on Thursday, August 13. Both Sensex and Nifty extended losses from the previous session even as oil prices eased, with traders bracing for some expiry-day volatility. However, a sharp divergence emerged between the benchmark indices by the end of the session, with the market regulator raising eyebrows over unusual spikes seen in Sensex in a matter of few seconds.

Sensex closed 114 points higher but Nifty ended in the red following the closing auction session (CAS) on August 13. Abnormal spikes in the indicative equilibrium price of Sensex during the CAS were noticed by the surveillance teams of Sebi. The reference price of Sensex was 77,829.60 at 3.15 pm, while the CAS-discovered closing price stood at around 78,080.

The market regulator in its latest order highlighted there were three sharp spikes in Sensex during the auction session. The first spike came at around 3.20 pm, when Sensex surged 362 points from 77,661.40 to 78,023 in a matter of two seconds. The second spike came at 3.24 pm when the benchmark index jumped 133 points. The third spike came at around 3.26 pm when Sensex rallied more than 405 points in just 28 seconds.

Who was behind the sharp spikes in Sensex?

Such massive spikes in a matter of seconds must have been driven by heavy buy orders at the fag end of the session. According to Sebi, Copthall Mauritius Investment, which is an entity owned by JPMorgan Chase, was the dominant buyer during the auction. It accounted for a whopping 86.6% of gross buy value in Sensex constituents during CAS.

But surprisingly, Copthall soon cancelled most of its buy orders that allegedly moved the index. Sebi said Copthall cancelled the highest number of buy orders, cancelling 10.38 lakh shares out of 31.66 lakh shares ordered, or 32.79%.

Let’s break down how Copthall’s buy orders may have influenced Sensex. During the first 362 point surge that occurred at 3.20 pm, Copthall accounted for nearly 100% of the overall Rs 67 crore buy order value placed at that time. Its 32 limit buy orders were placed across all Sensex stocks at nearly 3% above the reference price, while other market participants placed orders below 2%. Sebi said this showed an aggressive and index-wide price impact.

A similar pattern was observed during the second spike of 133 points at 3.24 pm, where Copthall accounted for 96% of the buy orders. During the third spike, it accounted for 85% of the total order value.

But why would Copthall place massive buy orders that would move Sensex, only to cancel them later? Sebi said Copthall had expiry-day Sensex option positions that would benefit from a higher Sensex closing value. It held net buy call positions and net sell put positions at the 77,500, 78,000 and 78,500 strike prices.

Also read | Sebi flags manipulative trades during CAS on Sensex expiry day, fines two entities

Who was placing heavy sell orders?

While Copthall’s heavy buy orders were allegedly creating huge spikes in Sensex, another entity was heavily placing sell orders, pulling the index down. According to the market regulator, Mumbai-based Mansi Share and Stock Broking Private Limited allegedly placed large sell orders at lower prices and then cancelled them. It placed sell orders worth Rs 145.65 crore between 3.21 pm and 3.26 pm across Sensex stocks and cancelled Rs 143.43 crore of those orders seconds later.

The same question arises for Mansi - why did it place such massive sell orders only to immediately cancel them? Sebi said Mansi had open put option positions on the expiry day, meaning that any downward movement in Sensex would have helped those positions.

Did Copthall and Mansi conspire together?

Sebi did not at this stage allege that Copthall and Mansi acted in concert. It said the two entities adopted opposite but aggressive price-impacting strategies during the same CAS session. Copthall’s orders pushed the index up while Mansi’s orders pushed it down temporarily until cancellation. The regulator calculated wrongful gains of Rs 2.96 crore for Copthall and Rs 71.64 lakh for Mansi, taking the total alleged wrongful gain to Rs 3.67 crore.

Sebi barred Copthall Mauritius Investment and Mansi Share and Stock Broking from accessing the securities market and participating in the CAS, alleging the two entities manipulated the Sensex on the August 13 expiry day to benefit from their derivatives positions.

Manipulation in CAS has serious market implications because the auction-discovered price is used for options settlement, mutual fund net asset value calculation and other market functions, the market regulator said in its order. It said such conduct, if allowed to continue, could damage fair price discovery and harm investors who trade in derivatives or invest through mutual funds.

Also read | Sebi bars two entities for 'manipulating' CAS

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