Algo-trading case: Sebi asks NSE why it didn’t cooperate in probe on unfair access
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Mumbai: The Securities and Exchange Board of India has asked National Stock Exchange of India Ltd (NSE) to explain why it did not cooperate with the regulator and an external forensic auditor when they were investigating allegations of unfair access in its algorithmic trading platform.
In a so-called show-cause notice, reviewed by Mint, Sebi says it had written to the stock exchange’s board on 28 February to inquire into these instances of non-cooperation by NSE employees. It also asked the board to find out “whether such suppression of facts, evasive replies, and contradictory statements were made with any specific intent to curtail examination”.
“NSE has not cooperated with Sebi, expert committee as well as forensic auditor appointed by NSE on Sebi’s direction. NSE also failed to provide information as sought by Sebi,” said the notice.
A Sebi spokesperson did not respond to an email seeking comment. An NSE spokesperson said the exchange would not comment since “the matter is between NSE and the regulator”.
On 22 May, Sebi sent a notice to the exchange and 14 of its officials, alleging they violated the Securities Contracts Regulations Act and Stock Exchange and Clearing Corporation norms by not giving equitable access to brokers.
NSE, in its share sale document on 28 December, disclosed that a forensic audit by Deloitte Touche Tohmatsu India LLP, showed its algorithmic trading platform and co-location facility were “prone to manipulation” and allowed “potential preferential access” to some brokers. Co-location refers to trading members locating their servers on the premises of the exchange.
In the Deloitte report, the auditor said it found emails which had instructions against movement of servers based on requests by members without proper justification and approval. “However, we were not made aware of any such instructions during discussions with the NSE team and we were informed that there was no documented policy in place in this regard,” said the Sebi show-cause notice quoting the Deloitte report.
Similarly, a Sebi technical advisory panel, that probed these allegations earlier, also alleged NSE wasn’t forthcoming with previous complaints of irregularities, said the show-cause notice.
“’Whether NSE was in know of what was going on and quietly addressed the complaints by introducing multi-cast but without accepting and fixing guilt’, the expert panel report questioned,” said the show-cause notice. Its reference is to the multi-cast system NSE started using for sending data feeds to members. Even Sebi’s examination team faced non-cooperation as the data of member-wise details of log-ins for all the days (sought by the regulator) was not given by NSE, said the notice.
The Sebi probe also found there was a case of contradictory instructions with regard to server specification requests. While internally, the exchange has instructed that no server change request would be entertained, NSE staff had communicated to brokers that server changes could be done, said the notice.
Interestingly, the Sebi notice mentions that while NSE did not allow three trading members to change their server, it allowed it in the case of OPG Securities. “NSE had informed some brokers about the benefit of accessing/connecting to secondary server which led to unfair and inequitable access to NSE systems by few brokers. NSE failed to comply with norms of fair access,” said the notice.
On 9 June, Sebi cleared the appointment of NSE’s new chief executive Vikram Limaye. On 7 June, Business Standard reported NSE would settle this case through the so-called consent mechanism, where the regulator allows for settlements without admitting guilt.