Sebi asks NSE to take stock of possible wrongdoing

NEW DELHI: The market regulator has asked the National Stock Exchange to investigate the possible collusion of its officials with brokers that may have led to breaches of fair access norms by providing unfairly preferential treatment to some. That could make things difficult for India's biggest stock exchange as it prepares for a much-anticipated initial public offering. The Securities and Exchange

Board of India (Sebi) wrote to NSE Chairman Ashok Chawla in the wake of findings by an expert committee on the practice of colocation, or the placement of servers belonging to brokerages adjacent to those of the exchange for a fee to give them an advantage in terms of speed.

In the interim, Sebi said all revenue stemming from the practice, including from fibre connectivity between brokers' colocation facilities and their offices, should be paid into an escrow account. The letter didn't contain details on how this should be implemented.

Sebi asks NSE to take stock of possible wrongdoing

Chawla confirmed receipt of the September 9 letter. "Sebi has asked the board of NSE to get all the concerns expressed by its expert committee examined and take necessary action within three months and give a report," he told ET.

The regulator said that the NSE board should "immediately initiate an independent examination (including forensic investigation by an external agency) of all the concerns highlighted by the Sebi expert committee in its report alleging lack of process that allowed this to happen and collusion if any and fix accountability for the aforesaid breaches covering NSE and stock brokers, vendors and outsourced entities involved in the issue." ET has seen a copy of the letter.

According to NSE's website, colocation allows the renting of rack space with low latency connectivity to the exchange.

The Securities and Exchange Board of India expert committee had actually raised the matter with the board of the exchange at a meeting on July 7, citing possible breaches of fair-access norms that involved some brokers gaining an advantage.

This included preferential access that allowed brokers to log in to multiple servers through multiple access points.

The expert committee had also said that the exchange's architecture in relation to the dissemination of 'tick-by-tick' data through transmission control was prone to manipulation and market abuse.

Sebi had first written to the stock exchange on the issue on March 29. NSE responded to these letters on May 12 and June 29. This was followed by the expert committee's findings being handed over to the NSE board on July 7.

Previous news reports had mentioned a whistleblower making complaints regarding unfair access. NSE has always refuted reports on any violations in this regard. The regulator had in August proposed measures to ensure that algorithmic trading and colocation don't give market participants an unfair advantage over those with no access to such technology.

"The academic literature... indicates that algorithmic trading may have accentuated the issues of adverse selection costs for non-algorithmic traders and increased probability of 'flash crashes' vis-a-vis the situation in the pre-algo / pre-colocation era," Sebi said in a discussion paper posted on its website on August 5. "Fair, transparent and non-discriminatory access is one of the key pillars of a safe and vibrant capital market."

Some of the proposals it had made included a minimum resting time for orders, speed bumps to delay order matching, randomisation of orders and review of tick-by-tick data among others.