NSE co-location case: Probe moves towards money trail, illegal profits

While the exchange has said that it has taken several steps over the years to strengthen its technology infrastructure in accordance with regulatory orders, officials said some of the new revelations call for a detailed investigation into whether individuals in higher positions have A group had banded together. Earn Illegal Profits by facilitating Preferential Trading Slots, which started a decade back.

Even a split-second fast access results in huge profits for a trader. Preferential access reportedly involved not only close proximity to exchange servers, but also providing fast and ‘tick-by-tick’ (TBT) data containing minute details about all trades and orders.

Explaining how the system works, one of the senior officials said, “The best analogy to understand this highly technical matter is cricket and betting.”

“Trading for an ordinary investor or broker in your normal terminal is like watching a live telecast of a match on television or in a stadium. But imagine you have your eyes and ears right behind every single player on the field to learn about them. tricks and strategies on a real-time basis before anyone else,” the official said.

“And, we’re not even talking about match-fixing. The sophisticated algorithms in the game make it possible to access vast amounts of data on a real-time basis with the use of modern computer systems and high-tech software solutions.” Officer added.

He also opposed an ongoing narrative that investors were at a loss, saying that genuine investors were definitely on the losing side because the system allowed a select few to buy shares at a lower price and faster. Offering the facility to sell at a higher price. Reach.

“For an individual investor the difference may be very small, possibly just a rupee or a few paise per share, but when you look at the huge volume of trades going on in the millions and crores every day, the total profit for the selected brokers can be could go into hundreds and thousands of crores over a period of a few years,” he said.

The issues under investigation include the roll-out and operation of controversial ‘co-location’ and sophisticated algorithm-based ‘high frequency trading’ facilities, internal and external to the potential economic gains made by some top exchange officials and some middlemen, as well as Includes approval.

Officials said that apart from the financial accounts of a large number of individuals, the focus would be on traces of funds at various levels, including the accounts of the brokers concerned, especially between 2009 and 2009. 2016, from inside or outside the exchange. If needed, help will be sought from foreign regulators and agencies, he said.

The National Stock Exchange, the country’s largest stock exchange, is believed to have introduced co-location services in 2009-2010.

A major impediment to the investigation so far has been the disappearance of e-mails and new efforts to retrieve them, as a large number of computers, including laptops used by some top executives, have long been removed by hardware exchanges. were destroyed. ‘E – garbage’.

The Securities and Exchange Board of India (SEBI) initiated an investigation into the matter in early 2015 after it was revealed by a ‘whistle blower’ that some brokers were allegedly provided with co-location facility, quick login and ‘darkness’. ‘Fiber’ – which can allow a trader to have split-second fast access to the data feed of the exchange.

NSE’s co-location facility allowed brokers to take fare-specific racks to co-locate their services and systems within the exchange premises for a low latency connection to the exchange.

The servers and systems housed in these racks receive live market data feeds and accordingly route your trade orders to access features like direct market access, algo trading and smart order routing.

In addition, the ‘tick-by-tick’ (TBT) data feed provided information about each change in the order book, but this information was reportedly given one by one, unlike a broadcast where everyone price information at the same time if they were at the same distance from the server.

Instead, the TBT data feed was transmitted sequentially in the order in which the broker was connected to or logged in to the server.

This reportedly gave the former the advantage of connecting to the server with the lowest load, so that data could be received faster than the others.

It was also alleged that some brokers had access to back-up servers because the load on those servers was low, while some not only logged on to select hi-tech servers first but by occupying the second and third positions. Tried to pull others out of the crowd. on those servers.

Over the years, SEBI has introduced stringent regulations to plug loopholes and concerns regarding algo trading and co-location facilities, including providing free TBT feed to all trading members and allowing exchanges to provide ‘managed co-location’. Including to say. ‘Location service’ through eligible vendors to ensure low cost services to all interested brokers.

It is also alleged that some brokers in connivance with NSE employees and outsourced staff obtained information about the load and start-up of servers including backup servers. This enabled the ‘first-to-connect’ brokers to obtain further data from others for the three years between 2011 and 2014.

Further, a trading member in NSE was allegedly given differential access in the form of ‘dark fiber’ at least 4-5 months prior to other members for linking NSE and BSE co-location, as per the complaints.

SEBI had initially constituted a cross-functional team to look into the matter and the regulator’s Technical Advisory Committee (TAC) later recommended setting up of an expert committee, which submitted its report to the regulator in March 2016.

It was found that NSE had violated the norms of fair access and allowed profit to some brokers.

Further, when the complaint was first made to NSE, its management dismissed it and did not take any steps to investigate the possibility of any collusion with the employees of the exchange.

The board of NSE was asked by the panel to initiate an independent investigation, including a forensic investigation by an outside agency. The exchange was also directed to keep its co-location revenue, which includes any fiber connectivity from the co-location facility of the broker to their office, to an escrow account.

There were indications that some brokers were moved to specific servers while others were denied. There were also instances where some co-location members were allowed access to multiple TBT servers by redistributing their IPs that did not conform to the sequential method.

In addition, e-mails reviewed during the investigation suggested that some brokers may have received advice from someone within the exchange that there was an advantage in obtaining market feeds upon initial login to TBT servers.

The forensic audit also observed the absence of protocols related to data retention, e-mails and other information for some former top executives of NSE.

Over the years, SEBI has passed several orders against NSE and its erstwhile top officials as well as some brokers in the co-location case for violating capital market rules.

Officials said the ongoing investigation is focusing on illegal gains made in the process and whether a ‘money-making machine’ was at play in the hands of a group of people.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.