Unauthorized Trades- Prevention is better than cure

A stock broker is one who invests other people™s money until its all gone.

–          Woody Allen, American Film Maker.

In any profession, you will find people who take advantage of those who aren’t in the know-how. Whenever you buy something, there are chances of you being cheated. But not all brokers fit the ˜swindler tag™. In fact, there are many brokers who do an exceptionally great job of guarding their clients’ interests.

Brokers are supposed to be the ones helping individual investors or for that matter any investor in the share market to purchase or sell shares; but what if the brokers themselves are the reasons for loss in the investor™s account?

Thus, to address the investor™s repeated complaints of unauthorized trading by brokers, Stock Exchanges are formulating regulations and methods to check the misconducts and misappropriations done by the brokers. One such mechanism introduced by SEBI is instructing the brokers to follow up with its clients to update their email ids and phone numbers so as to get intimation from the Stock Exchanges directly of the trades placed by them.[1],[2]

What is unauthorized trading?

Prior to placing an order to buy or sell securities for an investor, a broker must obtain the permission of that investor, if not, the transaction is considered unauthorized. In other words, any trade placed by the broker unilaterally and without the instruction or consent of the investor is unauthorized.

Nature of unauthorized trades observed in recent times

  • It is observed in recent times that brokers in order to generate revenue (brokerage) for themselves, lure gullible investors (senior citizens in many cases) holding a substantial portfolio. The brokers lure such investors with a handsome fixed return at regular intervals. The broker then uses the shares of the investors (mostly accumulated over a period of time from their hard earned savings) uses them as margin and then trades in derivatives in huge volumes. It is observed in several cases that the broker books losses in the investor™s account and then to recover the losses, sells the investor™s shares and thereby the investor loses his savings. The most common defense put up by the broker is that since they kept the investor informed at all times by sending them contract notes/ SMS/ email alert after each trade, the investor was in the know-how of the trades and thus it cannot now object to the losses.
  • The biggest and the most common mistake of the investor is that they blindly trust the brokers and rely upon their judgements, little realizing that they are the ultimate losers. Irrespective of profit or loss to the investor, a broker either way earns his brokerage on the trades executed in the investor™s account.
  • Another common and blatant mistake of the investors are that they often fail to check their account statements, contract notes and demat statements at regular intervals.

The Future & Options (derivatives) segment is often misused by the brokers. A large number of investors who do not even have an iota of knowledge of the working, technicalities and complexities involved in the F&O segment, blindly believe their brokers and agree to execute derivative trades in their accounts. It is investor™s greed that overpowers reason and logic.

Precautionary Measures

i.            Know Your Clients (KYC):- An investor should be very careful while signing the KYC papers. The investor should carefully read the KYC papers and then fill in the correct details and submit the documents as required. Investor™s should avoid signing on any blank forms/ papers and should also insist on a copy of the account opening and other documents signed from time to time.

ii.            Broker-Client Agreement:- The investor, prior to signing, should carefully read the agreement so as to understand the terms and conditions therein and also understand the working of the share market. The investor should refrain from signing any blank documents and insist on a complete set on the execution of the agreement.

iii.            SMS Alert/ Emails facility:- Only those investors who regularly check their SMS or email should opt for receiving details and documents via SMS/ Email. An investor should take utmost care to ensure that correct email id and mobile phone number is uploaded with the broker. If there is any subsequent change in the email id or phone number, the same should be promptly intimated to the stock broker. The importance of updating contact details is that, these days the Stock Exchanges directly intimate the investor™s of the trades executed in their account. In case the investor finds any discrepancy, they can immediately object to it and take it up with the concerned authorities.

iv.            Ledger statement:- An investor should insist and ensure that the broker sends them their monthly or quarterly ledger statements. On receiving the documents the investor should ensure that the trades reflected in the statement are as per their instructions and not otherwise. Hence the investor should constantly examine his portfolio to keep a check on unauthorized trades.

Corrective Steps to be taken:-

When unauthorized trades are executed in the investor™s account, the investor can first address it on a dedicated portal created by SEBI called SCORE[3]. SEBI™s SCORES aims at resolving matters in an easy and faster way. Details and progress of the complaint can be viewed online from the said website. It is only via stringent laws and even stringent implementation of laws laid down by SEBI would broker refrain from indulging in any practice contrary to the prescribed market mechanism.

If the dispute between the broker and the investor is not resolved through SCORE or the Conciliation mechanism of the stock exchanges, the parties are then required to initiate arbitration and refer the dispute to a panel of arbitrator for adjudication.

In order to protect oneself from such unauthorized trading by brokers, the investors should religiously review their monthly or quarterly statements, as periodic reviewing of one™s account would effectively safeguard the investor and its account from falling a prey to unauthorized trading. As the age old adage goes Prevention is better than cure.


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