The Securities and Exchange Board of India (Sebi) on Wednesday said it is in the “process of engaging a forensic auditor” for the ongoing investigation into the National Stock Exchange (NSE) co-location case to ascertain if brokers made unfair gains in connivance with the exchange officials.
“We want to have our own investigation. The forensic audit report of Deloitte (commissioned by NSE) did not go in depth on connivance issue and they just did it more on illustrative basis. The issue needs to be gone through comprehensively,” said Sebi Chairman Ajay Tyagi. He said Sebi has issued show-cause notices to NSE and 14 key management personnel as part of its investigation into alleged lapses in high-frequency trading or algorithmic trading offered through NSE’s co- location facility.
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. It is alleged that some brokers got preferential access through co-location facility at the NSE, early login and ‘dark fiber’ — which can allow a trader a split-second faster access to data feed of an exchange. Even a split-second faster access is considered to result in huge gains for a trader.
Earlier, the NSE had appointed forensic auditor —Deloitte — to look into the issues. Sebi also said it is premature to say if the regulator can settle the NSE case under it consent mechanism. 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. Algo orders now account for around 40 per cent of trades executed in exchanges in India.