NSE to appoint external auditor to probe allegations of unfair algorithmic access

The Sebi report has mentioned about brokerages having 'colocation' arrangement with the NSE and servers of these entities were located on the NSE premises.

By: ENS Economic Bureau | Mumbai | Published:September 23, 2016 1:17 am
National Stock Exchange, NSE, NSE algorithmic trading, Sebi, Sebi Technical Advisory Committee, business news The NSE move follows market regulator Securities and Exchange Board of India (Sebi) asking the NSE board to examine all the concerns raised by its technical committee and take necessary action within three months.

The National Stock Exchange (NSE) has decided to appoint an external auditor to probe allegations of providing unfair preferential access to some brokers for its high-speed algorithmic trading.

The NSE move follows market regulator Securities and Exchange Board of India (Sebi) asking the NSE board to examine all the concerns raised by its technical committee and take necessary action within three months. “As advised by Sebi, we will appoint an external auditor to look into the matter and suggest measures. We had earlier replied to the Sebi’s letter, but we will get an outside agency to investigate the allegations,” said an NSE official.

Algorithmic trading or algo in market parlance refers to orders generated at a superfast speed by use of advanced mathematical models that involve automated execution of trade while co-location involves setting up servers on the exchange premises.

Sebi’s Technical Advisory Committee (TAC) had in April said that NSE had violated norms of fair access and allowed preferential treatment to some brokers. It also recommended that Sebi should examine the issues raised by the TAC. Later Sebi asked the NSE to appear before its technical committee to explain the issues raised. Sebi then wrote a letter to NSE chairman Ashok Chawla.

“There are no definite findings in the committee report,” an NSE source said.

The Sebi report has mentioned about brokerages having ‘colocation’ arrangement with the NSE and servers of these entities were located on the NSE premises. It has suspected that these entities might have received sensitive information before others.

In August, Sebi said it was looking at various potential limits on algo traders, including imposing “random speed bumps,” which would randomly delay some orders. Sebi is also looking at introducing order randomisation, a process that would mean trades are settled on a random basis and not on a first-come-first-serve one. Algorithmic trading is becoming a big part of daily trading, prompting regulators to question whether investors with no access to this rapid trading are being disadvantaged. Algorithimic orders now account for around 40 per cent of trades executed in exchanges in India.