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Sub-Prime Securities?


Economic Times has the news that Prime Securities, a broker with the NSE, is in trouble for owing Rs. 80-100 cr. to the NSE for derivatives trading margin.

Prime Securities, headed  by N Jayakumar, owes more than Rs 80-100 crore to NSE in the equity derivatives segment, said a Sebi source. The exchange is, in turn, holding back payout to Prime and a few other traders and members who are believed to have dealt with Prime. The exchange authorities and Sebi are probing whether Prime was linked to any price manipulation in the spot and derivatives markets.

I’ve noted that Gitanjali Gems has fallen hugely; and Prime, it seems, owned about 17 lakh (1.7 million) shares, which have fallen from Rs. 500 to Rs. 200 in a week. This has happened with other shares owned by Prime and Jayakumar too.

In another twist, the broker is mentioned in an article about shady options trading. Players sell deep In-the-money options (both calls and put) of a far enough expiry date (say December) at a value that is less than the “intrinsic” value of the option. When the expiry happens, the option will get full intrinsic value and a deal is struck so the difference is equal to the interest rate the seller wants.

(Prime has gone to the SAT to appeal)

Also, it seems Prime Securities’ clients are not getting payouts (to the tune of Rs. 40 cr) and the money is being held back because Prime owes the exchange money. This makes little sense since clients are different from the broker, and they shouldn’t be punished for the brokers problem. However, it might just be that these “clients” are close to the broker’s own (it’s an open secret that brokers also trade through accounts of friends-and-family created as client accounts) – which is why NSE is holding payouts.

While Prime’s shares trade at a low Rs. 3.3 today, it’s important to learn from this that exchanges or companies will not reveal any information at the worst of times. There is no communication from any party about the happenings-on. Eventually, some kind of deal will be worked out and everything will go back to normal. But could something more sinister be in the works? Surely, Prime isn’t the only one in trouble.


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