1 percent to 11,344.61 in the first minute of trading before recovering sharply.
After 20 minutes, the index had retraced and was down 62.07 points or 0.52 percent at 11,772.90.
The interim order by the Securities and Exchange Board of India (SEBI) banned two dozen operators from buying and selling securities on their own account and came as the Sensex has been on a record-breaking run.
The operators named in the order can still invest money for other investors.
Those cited included some of the biggest names in the market such as Indiabulls, Karvy Stock Broking, ING Vysya and Motilal Oswal Securities.
"The (SEBI) order is factually incorrect," Gangan Banga, founder of Indiabulls, told the Economic Times of India, denying that the firm engaged in any wrongdoing. Others could not be immediately contacted for comment.
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SEBI has alleged some market players filed applications for IPO shares earmarked for small investors a