Brokers and the Securities and Exchange Board of India (SEBI) are at odds over the treatment of erroneous trades, with market participants seeking greater operational flexibility to close out such positions while the regulator remains concerned about the potential misuse of designated error accounts.
As per multiple sources, aware of the discussion, the regulator is considering changes to the existing framework governing the liquidation of erroneous trades before they are transferred to a broker's designated error account.
Under the proposal, any net profit generated from the liquidation of erroneous trades, calculated at the PAN level of each client within the same stock on the same trading day, would have to be credited to the Investor Protection Fund (IPF) of the respective stock exchange.
However, netting of profits and losses across different stocks may be permitted only between the equity cash and equity derivatives segments. Any net financial loss arising from the execution and subsequent liquidation of erroneous trades would continue to be borne entirely by the broker, as is the case under the existing framework.
SEBI believes that this mechanism would remove the economic incentive for brokers to misuse error accounts. With profits being diverted to the IPF and losses remaining with brokers, the regulator believes that the sequencing of liquidation would no longer be a major concern, allowing brokers to close erroneous positions based on administrative convenience and minimise market risk.