Can an Authorised Person Trade For Himself

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Introduction

Authorised persons are basically sub brokers that work on behalf of stock brokers to serve their clients. An authorised person or an AP, acts as an intermediary between the broker and the clients. This is similar to how a broker acts as an intermediary between the stock exchange and the clients. In return for their services, APs receive a share of the broker’s commission from the brokerage firm that they are associated with. 

Now that we know who is authorised person, let’s understand the role of an authorised person, before we delve into whether they can trade themselves. 

Additional Read: Aurhotized Person Exam

What does an authorised person do?

An authorised person has multiple functions to perform. They bring in clients to the brokerage firm, in their name, and they handle the trading and financial transactions that the clients engage in. APs, formerly known as sub brokers, act as an advisory to their clients and assist them in their trades. They also take part in making sure regulations and compliance requirements are met. In short, they get access to inside information and are privy to getting key market updates first hand. Does it mean they can’t trade for themself?

Additional Read: Authorised person vs sub broker

Does SEBI allow APs to trade for themself?

SEBI (Securities and Exchange Board of India) which is the governing body for stock market related aspects allows APs to trade for themselves. However, this is subject to a number of regulations and they are to be followed strictly. This is to make sure there is transparency in how the whole process works. 

1. Trading Accounts

APs are required to keep their personal trades and professional trades separate. Professional trades are those that they carry out on behalf of their clients. They are not allowed to trade through the clients’ online trading accounts for themselves. They must have their own trading account. 

2. Disclosure and Compliance

The principal broker that the AP is working with, should get a detailed disclosure of all the personal trading activities of their APs. This disclosure is mandatory and is aimed at identifying potential conflicts of interest. 

3. Conflict of Interest

The primary factor that could result in a conflict of interest is an AP using privileged information that they acquired through their position and role, to profit from their personal trades. Their account will be closely monitored for such activities. p>

4. Keeping Records

Complete records of their personal trades are to be maintained and always be available for audits in order to make sure the regulations are sincerely met.

Pros and Cons of an AP in trading for self

Pros

1. Market Knowledge Advantage

Authorised persons have a decent understanding of market trends and dynamics because of their profession. They can also access market research data and reports that are not available to retail traders. These datasets help them make more informed decisions about trading. 

2. Professional Experience

APs would have acquired over the years significant expertise in stock analysis, and their skills would have gotten more nuanced through the time. They might have learned strategies and tricks that probably aren’t that commonly known amongst retail traders. This privilege results in better decisions and trading outcomes for them. 

3. Additional Income

In addition to the income from the brokerage firm, in shared revenue, APs can create an additional source of income through their personal trading, which is much less time consuming for them considering the advantages they hold. 

4. Real-time Market Exposure

Their active engagement in the market gives them the opportunity to monitor real-time market movements, giving them an edge over the other traders. 

Cons

1. Conflict of Interest

When an AP engages in personal trading there is a substantial risk that they might put this higher up on their priority list ahead of their clients’ trades. There might even occur a bias between their trades and their clients’ trades.  All of this can lead to ethical and regulatory issues. 

2. Regulatory Scrutiny

Due to the high potential for ethical conflicts, the APs are burdened with stricture requirements in terms of disclosure and compliance. Moreover, the consequences of non-compliance can be severe in many cases. This can be stressful to the APs as they have to already balance between their clients and the personal trading, besides focusing on these regulations. 

3. Time Management

Even without the compliance burden, balancing responsibilities and managing time can prove difficult for APs who engage in personal trading. It requires one to plan and schedule their days efficiently and even then the days would be hectic to say the least. Stress levels can reach such heights that a burnout is very much possible. 

4. Financial Risk

While APs are prone to market risks just like any other trader, the edge that they have might play a role in influencing their trading patterns. They might take up more risks in comparison to regular traders and end up with higher losses. Potential overtrading can also happen due to this increased confidence levels, which might lead to capital erosion.

Conclusion

To successfully trade for yourself while being an AP, maintain clear boundaries, adhere strictly to compliance norms, and ensure transparent communication with your principal broker. This helps manage potential conflicts and keeps your trading activities above board.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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