Why India's market regulator barred a JPMorgan entity from the country's securities market

India's market regulator has barred a JPMorgan Chase & Co.-owned entity, Copthall Mauritius Investment, from the securities market until further orders, alleging its trading patterns were prima facie "manipulative in nature."

The interim order, released late on Wednesday, identified Copthall and Mumbai-based Mansi Share and Stock Broking as having undertaken manipulative trades under a newly introduced method of calculating closing prices on Indian exchanges.

JPMorgan declined to comment. Mansi Share and Stock Broking did not respond to a request for comment.

WHAT IS THE JPMORGAN ENTITY ACCUSED OF DOING?

The Securities and Exchange Board of India (SEBI) alleged Copthall used the newly introduced Closing Auction Session (CAS) to artificially push up prices of BSE Sensex stocks on August 13, when weekly derivatives contracts linked to the index expired.

According to the order, Copthall placed large buy orders across all Sensex stocks at prices significantly above prevailing market levels. SEBI said the orders were not driven by a genuine intention to acquire shares, noting that some were later cancelled.

The regulator alleged the trades were aimed at lifting the Sensex closing value and increasing the value of Copthall's expiring options positions, generating gains of 29.6 million rupees ($309,607).

WHAT IS THE CLOSING AUCTION SESSION WHERE MANIPULATION IS ALLEGED?

Introduced on August 3, the CAS is a brief end-of-day auction in which buy and sell orders are matched to determine a stock's official closing price. Similar mechanisms are used in other Asian markets including China, Taiwan, Hong Kong and South Korea.

The system replaced a methodology under which closing prices were based on the average price of trades executed during the final 30 minutes of continuous trading. Regulators said the change was intended to align Indian markets with global practices.

IS THE CLOSING AUCTION MECHANISM MORE SUSCEPTIBLE TO MANIPULATION?

Since its launch, the CAS has led to sharp swings and price divergences in benchmark indices.

Liquidity during the roughly 20-minute process has been thin and largely dominated by institutions. Exchange data showed CAS trades accounted for less than 1% of daily cash-market turnover and less than a third of volumes seen under the previous system.

The lower participation means relatively small buy or sell orders can have an outsized impact on key indices.

ARE OTHERS ACCUSED OF SIMILAR MALPRACTICE?

SEBI alleged Mansi Share and Stock Broking placed large sell orders in eight Sensex stocks below prevailing market prices during the CAS, depressing the index for about five minutes.

The regulator said Mansi later cancelled almost all of the orders after exiting profitable options positions.

WHAT'S THE ACTION AND WHAT HAPPENS NEXT?

SEBI has ordered the impounding of a combined 36.8 million rupees ($384,324), barred both firms from the securities market and prohibited them from participating in the CAS while the investigation continues.

Copthall, which invests in Indian stocks through block deals, can challenge the order before the Securities Appellate Tribunal.