SEBI’s probe into the role of brokers is in the final stages

“The total number of brokers that the regulator is probing is more than 50. These are the brokers whose names have appeared in the forensic audit report. SEBI is looking for brokers who have been mentioned far and wide in these reports as the regulator would not want anyone to default.

The second person said the regulator had tasked ISB Hyderabad in late 2018 to determine the quantum of illegal profits. “The regulator was looking into all the brokers who either made profit or avoided loss due to unfair advantage. The regulator had mandated ISB Hyderabad to look at the data of these 50-odd brokers for the period 2009-2016. Considering the huge dataset, the report is yet to be finalized, but is understood to be in advanced stages,” said this person.

This data will be crucial in identifying criminals and uncovering the magnitude of illegal profits made by select brokers.

The matter pertains to preferential access to the high-speed algorithmic trading platform of NSE to certain broking firms through their co-location service. Because of this advantage, they were able to earn an unfair advantage on the market or avoid losses.

In its order dated 30 April 2019, SEBI had asked NSE to submit 1,000 crore in an investor protection fund.

The regulator had conducted three forensic audits in the matter – on cash and currency segments of NSE by EY India; To determine the illegal profits made by the brokers by the ISB; and Deloitte Touche by Tohmatsu India LLP.

On 11 January 2019, Mint, citing a forensic audit report, reported that 62 brokers – some of which are top Indian and foreign firms – may have enjoyed unfair advantage due to preferential access.

These show that the average turnover and profits of these 62 brokers were higher during 2010-14, when they got undue access and went down on strengthening the NSE infrastructure. To be sure, profits could also have increased as a function of their trading decisions and calls.

In the cases of some brokers, the reduction in profits was minor and in some cases, the intra-day profits were significantly reduced. The forensic audit report shows that in some other brokers, the average overnight loss increased significantly.

ISB Hyderabad in its previous report had stated that Delhi-based broking firm OPG Securities had made a profit of 25 crore on account of this unfair advantage, as per the show-cause notice sent by SEBI in June 2018, which was reviewed Mint,

“Since the ISB was familiar with the matter and the NSE system, SEBI gave them an expanded mandate,” said another official.

In addition, some former and present officials of the NSE received calls from the Central Bureau of Investigation (CBI) on Monday and were subject to specific queries, a third person said. He too declined to be named. “The questions were related to the NSE infrastructure, whether the NSE officials were aware of the gaps in the NSE system for dissemination of market information, and when were those defects rectified,” said the third person. he said.