1. The matter arises out of a Show Cause Notice dated 24/08/2005 (hereinafter referred to as "the Notice") issued by the Securities and Exchange Commission of Pakistan (hereinafter referred to as "the Commission") to Aqeel Karim Dhedhi Securities (Pvt.) Limited (hereinafter referred to as "the Respondent") Member-broker Karachi Stock Exchange (Guarantee) Limited (hereinafter referred to as "the KSE").
2. Brief facts of this case are that between 1st March 2005 and 29th March, 2005, the Respondent carried out 21 trades of the shares involving total 510,400 shares of Oil & Gas Development Company ("OGDC"), Pakistan Oilfields Limited ("POL"), Pakistan Petroleum Limited ("PPL") and Pakistan Telecommunication Company Limited ("PTCL") through the Karachi Automated Trading System ("KATS") at KSE on behalf of eight of its clients.
3. In the course of these trades, the Respondent purchased and sold, on behalf of eight clients, 64,000 shares of OGDC, 157,500 shares of POL, 160,900 shares of PPL, and 128,000 shares of PTCL.
Each of these trades cancelled each other out with the effect that there was no change in the beneficial ownership of the shares.
4. This practice on the part of the Respondent is likely to interfere with the fair and smooth functioning of the market by creating a false and misleading appearance of trading activity in the scrips mentioned hereinabove. Such practices are contrary to the behavior expected of a broker and are detrimental to the investors' interests.
5. The Commission obtained the KATS data from the KSE for the relevant period, which showed that during the month of March 2005 the Respondent had executed the following trades which cancelled each other out and did not result in a change in beneficial ownership: {{TABLE}} DATE CLIENT CODE NAME OF SHARE NUMBER OF SHARES PURCHASE AND SALE RATE TIME OF EXECUTION 7/03/2005 1512 OGDC-REG 25,000 141.50 1316070015 8/03/2005 1186 OGDC-REG 38,000 138.65 1003370029 14/03/2005 1031 OGDC-REG 1,000 172.85 1208400025 1/03/2005 1182 POL-REG 1,500 327.00 945310083 3/03/2005 1512 POL-REG 32,300 331.00 1233300035 3/03/2005 1512 POL-REG 12,700 331.00 1233340003 3/03/2005 1512 POL-REG 10,700 332.00 1243430017 3/03/2005 1512 POL-REG 39,300 332.00 1243450044 3/03/2005 1512 POL-REG 10,700 332.00 1243450045 3/03/2005 1512 POL-REG 39,300 332.00 1243490029 10/03/2005 1524 POL-REG 11,000 361.50 1223580038 21/03/2005 1080 PPL-REG 45,200 264.90 1125500024 21/03/2005 1080 PPL-REG 3,100 264.90 1126040018 21/03/2005 1080 PPL-REG 5,200 264.90 1413480008 21/03/2005 1080 PPL-REG 31,800 264.90 1413480009 21/03/2005 1080 PPL-REG 18,200 264.90 1413500027 21/03/2005 1080 PPL-REG 9,000 264.90 1413500028 21/03/2005 1080 PPL-REG 19,200 264.90 1413530016 21/03/2005 1080 PPL-REG 21,800 264.90 1413550030 29/03/2005 1753 PPL-REG 7,400 215.00 1338370020 4/03/2005 1196 PTC-REG 128,000 73.25 951450007
6. In view of the aforesaid data, the Commission issued a Notice dated 24/08/2005 ("the Notice") to the Respondent. In this Notice, the details of the aforesaid facts were provided and the Respondent was asked to show cause as to why action should not be initiated against the Respondent under the Brokers and Agents Registration Rules, 2001 ("the Rules"). A copy of the summary of the KATS data was also sent to the Respondent. The Respondent was asked to submit a written reply to the Notice within seven days from the date of the Notice and the first hearing was fixed in Islamabad for 12/09/2005.
7. The Respondent submitted a written reply to the Notice through two letters dated 30/08/2005 and 01/09/2005. On the date of hearing, Mr. Muhammad Ali Yaqoob, Head of Institutional Desk, and Mr. Tariq Adam Ghumra, Head of Operations, appeared before the undersigned as authorized representatives of the Respondent. The main points raised by the Respondent in its written reply and in the course of hearing were as follows: (i). That high net worth clients and day traders trade substantial quantities of shares within the day locking-in profits at relatively low spreads. Day trading requires very quick decision making and reflexes. Often a day trader buys a certain quantity and may decide to execute a counter trade within a very short period of time without indulging in any unlawful activity. With this back ground, item-wise response to Annexure-A attached with the Notice is as under:
(a) Client Code No.1512-OGDC Trades This client is a very active, high net worth, day trader who trades in very large volumes. On March 07, 2005, he purchased and sold large quantities of OGDC shares. His buy order for 25,000 shares was allocated order No.51992502 whereas his order for sale of 100,000 shares was allocated order No.51992952 indicating that the buy order preceded the sell order by 450 other orders. The sell order for 100,000 shares was executed via nine trades as under: {{TABLE}} Sr. No. Trade No. Executed Qty. Time 1 9102379 4,600 13:16:07 2 9102380 1,000 13:16:07 3 91042381 50,000 13:16:07 4 91042382 1,000 13:16:07 5 9102383 2,000 13:16:07 6 91042384 25,000 13:16:07 7 91042385 2,000 13:16:07 8 91042386 1,000 13:16:07 9 91042387 13,400 13:16:07 Total: 100,000 The buy order was a limit order put in earlier but was executed later when the price level was matched with the sell order.
(b) Client Code No.1186, OGDC-Trades: This client is an active, high net-worth, day trader. On March 08, 2005, the client purchased and sold various quantities of OGDC shares at different times. The transaction of 38,000 shares mentioned in the notice was part of a sell order for 38,500 shares that was executed through two trades having No.91121764 and 91121780 for 38,000 and 00 shares respectively. Incidentally, the 38,000 shares through trade No.91121764 crossed/matched with 38,000 shares out of a buy order for 100,000 shares executed via five trades as stated in the table below: {{TABLE}} Sr. No. Trade No. Executed Qty. Time 1 91121760 49,800 10:03:37 2 91121761 2,000 10:03:37 3 91121762 200 10:03:37 4 91121763 10,000 10:03:37 5 91121764 38,000 10:03:37 Total: 100,000
(c) Client Codes 1031 & 1182, OGDC & POL-Trades: These are two separate transactions related to the two clients' codes in the scrips of OGDC and POL. The trades were executed through AKD Trade's Gateway for internet clients that incidentally have the same client codes. On March 14, 2005 Mr. Hasan Sibtain, Client No: 1031 of AKD Trade purchased and sold a total of 5,500 shares of OGDC at various prices. However, his sell order for 1,000 shares @ 172.85 incidentally crossed/matched with a buy order of 50,000 shares @ 172.85 vide Order No.53652250 of another client of AKD Securities bearing number 1031. Order No 53652250 was executed between 12:08:20 and 12:08:40 through seven different Trade Numbers as follows: {{TABLE}} Sr. No. Trade No. Executed Qty. Time 1 92241166 25,000 12:08:20 2 92241167 1,500 12:08:20 3 92241179 5,000 12:08:22 4 92241181 1,000 12:08:22 5 92241347 3,600 12:08:40 6 92241348 1,000 12:08:40 7 92241356 12,900 12:08:40 Total: 50,000 Similarly, on March 1, 2005 Client No. 1182 of AKD Trade (jointly held by Mr. Mohammad Masood Alam and Ms. Nasira Khatoon Qureshi) sold 1,500 shares of POL @ Rs.327.00. This order was routed through the KATS Gateway. Incidentally, this order (of 1500 POL sell) crossed/matched with a buy order of 50,000 shares of POL vide Order No: 50499208 by AKD Securities' Client No 1182. The subject order was executed via 16 trades as follows: {{TABLE}} Sr. No. Trade No. Executed Qty. Time 1 89953285 1,500 9:45:31 2 89953286 100 9:45:31 3 89953287 200 9:45:31 4 89953288 200 9:45:31 5 89953289 1,000 9:45:31 6 89953290 2,000 9:45:31 7 89953291 5,000 9:45:31 8 89953292 200 9:45:31 9 89953293 5,000 9:45:31 10 89953294 15,000 9:45:31 11 89953295 1,000 9:45:31 12 89953296 1,000 9:45:31 13 89953297 1,000 9:45:31 14 89953284 2,000 9:45:31 15 89953580 3,200 9:45:40 16 89953599 11,600 9:45:41 Total: 50,000
(d) Client Code No.1512, POL-Trades: On March 3, 2005 Client 1512 who is an active day trader, purchased and sold large quantities of POL Shares. The details of trades that crossed/matched are under:- {{TABLE}} Details of Buy Order Details of Sell Order Order No. Qty. Trade No. Executed Qty. Time Order No. Qty.
Trade No. Executed Qty. Time 51287853 50,000 90519709 17,700 12:33:30 51285815 50,000 90519710 32,300 12:33:30 90519710 32,300 12:33:30 90519747 12,700 12:33:34 51287916 50,000 90519747 12,700 12:33:34 51294413 50,000 90530472 10,700 12:43:43 90519748 100 12:33:34 90530514 39,300 12:43:45 90519749 37,200 12:33:34 51294476 50,000 90530515 10,700 12:43:45 51299862 50,000 90530464 25,000 12:43:43 90530615 39,300 12:43:49 90530465 3,000 12:43:43 90530466 100 12:43:43 90530467 100 12:43:43 90530468 500 12:43:43 90530469 500 12:43:43 90530470 10,000 12:43:43 90530471 100 12:43:43 90530472 10,700 12:43:43 51299924 50,000 90530514 39,300 12:43:45 90530515 10,700 12:43:45 51300015 50,000 9053614 5,000 12:43:49 9053615 39,300 12:43:49 9053616 5,700 12:43:49 The Client placed five buy orders of 50,000 shares of POL each which were executed between 12:33:30 to 12:43:49. These five orders were completed in two, three, nine, two and three trades respectively. Total buy orders of 250,000 shares were completed in 19 trades. Out of these trades, 6 were crossed and matched with sell orders of the client, although there was difference of thousands of other orders between buy and sell orders.
(e) Client Code No.1524, POL-Trades: This client is another very active, high net-worth, day-trader. On March 10, 2005, the client purchased and sold various quantities of POL shares at various prices at different times. On that day, a buy order for 25,000 POL shares vides Order No: 52944817 submitted earlier in the day was executed between 12:23:46 and 12:26:58 via four Trade Orders: 91799449 (1,500; 12:23:46), 91799450 (10,000; 12:23:46), 9179951 (2,500; 12:23:46) and 91799587 (11,000; 12:23:58). It was a coincidence the last trade of 11,000 shares crossed/ matched with the sell order 53009725 for 11,000 shares that was chronologically placed after the buy order. There is a difference of 64,908 other orders in the market between the buy and the sell orders.
(f) Client Code No.1080, PPL-Trades: This client code belongs to another very high net-worth individual who trades very large volumes.
On March 21, 2005 this client purchased and sold very large volumes of PPL shares. The details of buy and sell orders and trades which were crossed and matched are as under: Details of Buy Order Details of Sell Order {{TABLE}} Order No. Qty. Trade No. Executed Qty. Time Order No. Qty. Trade No. Executed Qty. Time 54965097 50,000 93169118 45,200 11:25:50 54965112 50,000 93169117 4,800 11:25:50 93169144 1,700 11:25:57 93169118 45,200 11:25:50 93169167 3,100 11:26:04 54965233 50,000 93169167 3,100 11:26:04 55024557 50,000 93205304 2,000 14:13:48 93169168 46,900 11:26:04 93205305 500 14:13:48 54974437 40,000 93176140 28,300 11:45:33 93205306 500 14:13:48 93176157 6,500 11:45:35 93205307 2,000 14:13:48 93205310 5,200 14:13:48 93205308 3,000 14:13:48 54987126 50,000 93205311 31,800 14:13:48 93205309 5,000 14:13:48 93205344 18,200 14:13:50 93205310 5,200 14:13:48 549871139 50,000 93205345 9,000 14:13:50 93205311 31,800 14:13:48 93205386 19,200 14:13:53 55024596 50,000 93205343 22,800 14:13:50 93205428 21,800 14:13:55 93205344 18,200 14:13:50 93205345 9,000 14:13:50 55024625 50,000 93205384 20,000 14:13:53 93205385 10,800 14:13:53 93205386 19,200 14:13:53 55024656 50,000 93205427 1,000 14:13:55 93205428 21,800 14:13:55 93205429 5,000 14:13:55 93205430 500 14:13:55 93205431 500 14:13:55 93205432 500 14:13:55 93205433 500 14:13:55 93205434 1,000 14:13:55 93205435 100 14:13:55 93205436 200 14:13:55 93205437 1,500 14:13:55 93205438 2,000 14:13:55 93205439 1,000 14:13:55 93205440 200 14:13:55 93205441 1,000 14:13:55 93205442 13,200 14:13:55 The client placed five orders of PPL shares of 50,000 shares each which were executed between 11:25:50 to 14:13:55 in 33 trades. Simultaneously, the client placed five different orders for sale of 240,000 shares which were executed between 11:25:50 to 14:13:55 in 12 trades. {{TABLE}} Out of 33 buy trades, 8 sell trades were crossed and matched
(g) Client Code No.1753, PPL-Trades: On March 29, 2005, the client purchased 25,000 shares and sold 20,000 shares of PPL. The details of the trade as follows:- Details of Buy Order Details of Sell Order Order No. Qty. Trade No. Executed Qty. Time Order No. Qty. Trade No. Executed Qty. Time 55590889 5,000 93481591 800 13:01:24 55613360 20,000 93497909 5,500 13:38:19 93481592 500 13:01:24 93497910 2,000 13:38:19 93481593 500 13:01:24 93497911 100 13:38:19 93481594 3,200 13:01:24 93497957 2,000 13:38:26 55613519 20,000 93498033 10,000 13:38:37 93497985 1,000 13:38:31 93498034 7,400 13:38:37 93497989 500 13:38:31 93498035 2,600 13:38:37 93497991 1,000 13:38:31 93498006 500 13:38:33 93498034 7,400 13:38:37 The client put in an order for purchase of 5,000 shares earlier in the day. Subsequently, he put in a sell order for 20,000 shares later in the day (a difference of 22471 other orders). Later, the client again put in another buy order for 20,000 shares (a gap of 159 orders between the previous sell order and the new buy order). Sell order was executed via nine different trades. Incidentally, Trade No: 93498034 for 7,400 shares of PPL crossed/matched with 7,400 shares of his own buy order subsequently placed and which was executed via three different trades.
(h) Client Code No.1196, PTC-Trades: This is another day trading account. On March 4, 2005 this client purchased and sold large quantities of PTC. A buy order of the client for 250,000 shares vide Order No: 51458829 was executed via three trades numbered: 90648947 (22,000; 09:51:45); 90648948 (100,000; 09:51:45) and 90648949 (128,000; 09:51:45).Incidentally, the last trade for 128,000 shares vide Trade No: 90648949 crossed/ matched with a sell order numbered: 51458584 for the same quantity that was placed chronologically earlier in the KATS System.
(ii) That there was no violation of any rule nor was any act committed in the trades detailed above that can be termed as an act intended to create a false and misleading appearance of trading activity to influence the market in terms of volume and price. The above activity was perfectly lawful and did not in any way interfere with the fair and smooth functioning of the market detrimental to investor's interest. All the trades mention in the Notice were perfectly lawful transactions and did not violate any rule or law more specifically there was no violation whatsoever of the Rules and the Respondent has not failed to maintain high standards of integrity, promptitude and fairness nor has failed to exercise due care and skill in the conduct of business Therefore, the Respondent on the basis of above submissions requested that the Notice dated 24/08/2005 be withdrawn.
8. I have heard the views and contentions of the Respondent at length after carefully examining the record, I find that the following issues arise out of this matter:
(a) Whether the acts of commission and omission as alleged against the Respondent constitute a breach of the Rules? If so, up to what extent?
(b) What should the order be?
Each of these issues has been examined seriatim:
(i) In the course of its written as well as oral contentions, the Respondent has admitted that the Respondent carried out all 21 trades detailed in the Notice dated 24/08/2005. In respect of two of these trades, the Respondent has informed that clients' codes of AKD Trade and AKD Securities in OGDC and POL scrips were matched due to same client codes and confirmed that the buyers and sellers of the trades were different. The Respondent furnished clients' ledgers as proof of change in the beneficial ownership of the shares relating to these trades. In respect of the remaining 19 trades, the Respondent pleaded that this took place as most of its clients are day traders and place buy and sell orders simultaneously. Owing to hike in price, a part of these buy orders remain as unexecuted limit orders in the system and matched with the sale orders of the same clients when price level was hit.
(ii) It is evident from the relevant KATS data obtained from the KSE, (which has not been disputed by the Respondent) that all except two of the aforesaid trades had the effect of canceling each other out and did not result in the change in beneficial ownership of these shares. Such trading activity interferes with the fair and smo oth functioning of the market due to the fact that it gives the impression of shares being traded in the market when in fact the trades remain in the possession of the same person. The interests of the investor suffer in turn due the fact that they receive a false impression of trading in the market which influences their decision to invest or trade in the market.
(iii) Although the KATS has features to cancel the unexecuted trades but the Respondent does not have the practice that pending unexecuted orders are cancelled before a contra order for the same scrip is placed in KATS for the same client. It is due to this reason that the buy and sell orders crossed/matched with each other and cancelled each other out. In this way, this practice of the Respondent and such pattern of trading results crossed/matched trades which become part of total volume of shares traded at the exchange, although there is no change in the beneficial ownership of the shares. The cumulative impact of such trading influences the opinion of the investors as they believe heavy activity (buy and sell) in a scrip is taking place and thus the investors are misled. Hence, the Respondent has failed to exercise due skill care and diligence in the conduct of its business.
(iv) I do agree that change of beneficial ownership did take place for the two transactions executed by them on behalf of clients' codes 1031 and 1182 in view of the documentary evidence provided by the Respondent which confirms that the transactions did in fact resulted in a change in beneficial ownership. However, the Respondent in respect of these two transactions confirmed that the matching of these transactions had occurred due to same clients' codes of AKD Securities and AKD trade. This reflects lack of internal controls as no unique client identity within the Respondent's brokerage house exists and the client does not bear unique client identity to be recognized in his dealings with the Respondent. It is the responsibility of the Respondent to ensure proper internal controls and it has clearly been negligent in failing to ensure that a proper system was in place in this regard.
(v) By engaging in and allowing trading activity in the market that results in creating a false impression of trading activity in particular scrips, is not only contrary to high standards of integrity expected of Respondent as broker but is also improper, dishonorable and disgraceful and contrary to law.
(vi) It is evident from the facts detailed above that the Respondent has failed to follow the requirements of the Code of Conduct prescribed for brokers. By executing and permitting to be executed trades which cancelled each other out and did not result in the transfer of beneficial ownership, the Respondent has indulged in acts which have interfered with the fair and smooth functioning of the market to the detriment of the interests of investors.
(vii) In failing to ensure that a proper system was in place to avoid matching of unexecuted buy orders with sale orders of the same clients at the same price, the Respondent has failed to act with due skill, care and diligence in the conduct of its business. Consequently, the Respondent has failed in its duty to maintain high standards of integrity, promptitude and fairness in the conduct of all its business and has in fact indulged in dishonorable, disgraceful and improper conduct on the stock exchange and has therefore acted contrary to the requirements of the Code of Conduct for brokers annexed to the Rules.
9. The Respondent has acted contrary to at least four provisions of the code of conduct prescribed for brokers in the Rules in violation of Rules 8(iv) read with Rules 12 of the Rules. The violation of the Rules is a serious matter which entitles the Commission to suspend the Respondent's license, however, I have elected not to exercise this power at present but in exercise of the powers under Rule 8(b) of the Rules, I hereby impose on the Respondent, a penalty of Rs. 50,000/-(Rupees fifty thousand only). This sum of Rs. 50,000/- (Rupees fifty thousand only) be deposited by the Respondent in the designated bank account maintained in the name of the Securities and Exchange Commission of Pakistan with Habib Bank Limited within 30 days from the date of this order and furnish the receipted challan to the Commission.
10. In addition to the aforesaid, I herby direct the Respondent to abstain from buying and selling of shares in a manner that these do not result in a change in the beneficial ownership of the shares failing which action will be taken against the Respondent in accordance with law.
11. This Order is issued without prejudice to any other action that the Commission may initiate against the Respondent in accordance with law on matters subsequently investigated or otherwise brought to the knowledge of the Commission.