A PricewaterhouseCooper audit report on the MCX has named leading members Edelweiss Trading and Holding, Karvy Comtrade and RiddhiSiddhi Bullions for indulging in artificial trades on the exchange platform to boost volumes.
The audit report, which was uploaded on the stock exchanges Website, has identified 18,521 wash trades aggregating to ₹2,052 crore in the MCX since inception, to September 2013.
Wash trade is a form of transaction entered by two entities of the same group. The deal neither results in any profit or loss nor delivery of goods, but various charges such as transaction charges, brokerages and taxes are levied. These trades are entered into to artificially boost volume of a concerned contract.
The commodity market regulator had ordered the audit on the MCX to ascertain the impact of ₹5,600-crore trade default by the National Spot Exchange, a group company of the MCX.
Of the total wash trades entered on MCX, the order gap between the buyer and seller in 1,565 transactions aggregating to ₹1,182 crore was less than five seconds. In the remaining orders, the order gap was 1.55 seconds. The Indian Bullion Markets Association, a group company of MCX, executed 6,388 wash trades valued at ₹345 crore.
The report is crucial for bidders who have lined up to buy 24 per cent stake in the MCX, the country’s largest commodity exchange. Financial Technologies, which owns the exchange, was forced to offload its stake after the regulator declared it and its promoter Jignesh Shah, who is in police custody in the trade default case, as not ‘fit and proper’ to own stake in commodity exchanges.
Bidders concernIn a development that would worry potential bidders, the report points to the lack of automated surveillance mechanism enhancing the risk of perpetration of participants’ misconduct on the MCX. Surveillance process in this sector is designed to detect anomalies post occurrence, than prevent proactively. It appears that the MCX surveillance process has been designed in such a way that anomalies falling below the preset thresholds remain undetected, the audit report said.
The exchange also effected client code modification in proprietary trades breaching FMC guidelines. A limited review of the client code modification post April 2007 revealed 114 transactions worth ₹13.56 crore, where proprietary trades of members were converted into client trade and vice versa, the report said. About 55 wash trades, worth ₹74 crore, were converted into normal trades after client code modification, it added.