Modus operandi of the broker-fund manager link

An order to buy or sell shares is decided by a fund manager who then signals it to their broker or lead manager, who then forwards the order to a licensed broker for execution.

Before transmitting the order to the broker to execute it, a position is taken through an accommodating broker in the F&O segment if the stock is traded there. Suppose, for example, that an order is issued to buy a stock in the large cap stock category. This trades in the F&O segment. A forward buy position would be taken. This would help generate returns as the size of the order could be large and would change the market price of the stock purchased. Once the quantity ordered is nearly complete, the futures trade would be reversed and the position taken thus settled.

The difference between the purchase price and the sale price is pocketed without anyone knowing. The spot market order is completed. The same would apply if the order is a sell order. Go short in the futures and near the end of the order place the short future. This method is ideal when the stock is in the futures segment.

Now let’s come to a situation where the stock comes from the Midcap or Smallcap segments and is not traded in the futures segment. The situation changes. In the case of a buy order, a position is taken in the cash markets before the start of the execution of the order. When completed or nearly completed, it is reversed. In the event of a sell order while the reverse occurs, it should be kept in mind that regardless of completion, the short sale must be settled before the end of the day, as all sales cash should result in deliveries. If the order continues the next day, similar positions are taken again the following day.

Now consider another case where shares are available from a market counterparty. Here, the share price at which the transaction would be concluded is finalized. The price begins to rise as the order is executed and the difference between the buy price and the traded price is settled.

The main players in this whole modus operandi are the fund manager, the broker or chief trader, and the accommodating broker. In most cases, if the scale of operations is large, there would be an agreement between the broker/dealer and the fund manager. The loot is split between the broker on one side and the fund manager and broker on the other side. Percentages would vary depending on size, number of people involved, etc. Confidentiality being the key, the sharing is done more or less on an equal footing which is pre-decided. Various options are used, including negotiating different names, etc.

The key is that all of these leave traces and there have been countless cases where transactions made in the name of family members have subsequently been detected. Therefore, an appropriate system, without a trail, must be put in place.

Even TV presenters trading in the names of family members have been arrested. The solution, which is relatively safer, is for the broker to provide an entity where these transactions are made and all profits are settled in cash.

Can this link be detected or broken? Yes. There have been various audits which are done by finance companies, which see the order details through transactions as it is fulfilled. Calls from the trading floor are all on recorded lines, which makes life more difficult. Although there are chances of getting caught up in something illegal, no one can save someone who attracts attention while driving a car that is an icon in itself.

The much-talked-about Lamborghini car made the fund manager and chief dealer someone others became jealous of due to unsolicited and unwarranted spotlighting. It should be an easy case for regulators to crack and fill many gaps.


About the author