Updated: February 12, 2021 8:55:25 am
Capital market regulator Securities and Exchange Board of India (SEBI) on Wednesday (February 10) imposed a penalty of Rs 1 crore on the National Stock Exchange (NSE), and Rs 25 lakh each on Chitra Ramakrishna and Ravi Narain, the former managing director and vice-chairman of the exchange respectively, in connection with its three-year investigation in the co-location case.
What is the National Stock Exchange (NSE) co-location case?
The NSE is facing allegations that some brokers got preferential access through the co-location facility at the stock exchange, early login, and ‘dark fiber’, which can allow a trader a split-second faster access to the data feed of an exchange. Even this infinitesimally sooner access is considered to result in huge gains for a trader.
In January 2015, a whistleblower wrote to SEBI alleging that a few brokers were able to log into the NSE systems with better hardware specifications while engaged in algorithmic trading, which allowed them unfair access and advantage.
The unfair access issue pertains to 2012-14 when NSE used to disseminate price information through a unicast system. In such a system information is disseminated to one member after another.
The whistleblower’s letter to SEBI alleged that sophisticated market manipulation has been taking place for several years at the NSE co-location centre. It also said that NSE had allowed non-empanelled Internet Service Provider (ISP) to lay fibre cables on its premises for few stock brokers.
What happened after the allegation of unfair access in algo trading at the NSE came to light?
Following three letters from the whistleblower, SEBI formed an expert committee under the guidance of its Technical Advisory Committee (TAC) to examine the allegations against NSE.
The expert committee found that the architecture of NSE with respect to dissemination of tick-by-tick (TBT) data through Transmission Control Protocol/Internet Protocol (TCP/IP) was prone to manipulation and market abuse.
It also found that preferential access was given to stock brokers, as it was possible for a stock broker to log in to multiple dissemination servers through multiple IPs assigned to them.
It was also possible for a single member to have multiple logins to a single dissemination server through multiple IPs assigned to it. As a result, stock brokers had a substantial advantage by logging in first or second or third.
The committee also found that NSE followed a static mapping process for allocating members’ IPs to dissemination servers due to which a few brokers were able to log on to the fastest dissemination servers.
Subsequently, SEBI identified 15 stock brokers for investigation in the case.
Ramakrishna resigned from the exchange in December 2016, much ahead of the scheduled completion of her term. Narain quit in June 2017.
In May 2018, the Central Bureau of Investigation (CBI) registered an FIR against a Delhi-based stock broker, Sanjay Gupta, promoter of OPG Securities Pvt Ltd, for allegedly manipulating the NSE system for two years to get first access to markets when they opened. The CBI case is still under investigation.
What action had SEBI taken earlier in the case?
On April 30, 2019, SEBI came down heavily on NSE for alleged lapses in high-frequency trading offered through its co-location facility, directed the exchange to disgorge Rs 624.89 crore, and barred it from accessing the market for funds for six months.
SEBI also asked Narain and Ramakrishna to disgorge 25 per cent of their salaries drawn during a certain period. They were also prohibited from associating with a listed company or a market infrastructure institution, or any other market intermediary for a period of five years.
What does the latest SEBI adjudication order mean for NSE?
The new management of NSE had made several attempts to settle the case through the consent mechanism of SEBI, which allows for settlement of the case without the admission or denial of guilt. SEBI had rejected the consent application of NSE, and proceeded with its probe.
The latest SEBI order will bring NSE closer to closure of the case which has been ongoing since 2016. So far, NSE has disgorged Rs 624.89 crore it made in profits from its co-location facility to SEBI, in compliance with the order of the regulator.
The closure of this controversial case may help NSE bring out its Rs 10,000 crore Initial Public Offering (IPO) that has been delayed because of the co-location probe.
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