Mumbai: The National Stock of Exchange of India Ltd (NSE) will appoint a third-party auditor to examine allegations of unfair access for some brokers in algorithmic trading, said a top official of the exchange, on the condition of anonymity.
This comes after a Securities and Exchange Board of India or Sebi-appointed committee found instances of fair access violation by the exchange prompting the regulator to write to NSE, said a person with direct knowledge of the matter.
“We have been asked to submit a report within three months. We will get the issues raised by the regulator by a third party external agency,” said the NSE official.
An NSE spokesperson confirmed this development without going into details. The Economic Times first reported this story on Thursday.
NSE’s board was supposed to examine this violation and fix responsibility. The audit would cover the exchange, its brokers and vendors, and also look into the possibility of collusion, this person added.
The exchange is also required to deposit the revenues gained from its co-location facility in an escrow account till the independent auditor files the report.
An email sent to Sebi was not immediately answered.
On 5 April , a Sebi panel called the Technical Advisory Committee (TAC) found that NSE had violated norms of fair access and allowed some brokers to benefit. The committee had also recommended that these issues be examined by the Sebi officials.
In July, a seven-member Sebi team had examined these allegations and asked NSE to appear before its technical committee to present its defence.
After this examination, Sebi submitted its final report to NSE which alleged that a certain broker logged in consistently to the servers with better hardware specifications allowing it to gain an edge.
Algorithmic trading or high-frequency trading (HFT) refers to the use of electronic systems, which can potentially execute thousands of orders on the stock exchange in less than a second. Trading firms that have faster access tend to have an edge over others.
The allegations against NSE pertain to members who co-locate their servers on the premises of the exchange. Even at these co-located centres, some of the servers themselves might have differing hardware capabilities or workloads.
NSE has consistently maintained that it has not done anything wrong and it has refuted allegations of unfair access in the TAC report.
The unfair access issue first came to light when a whistle-blower who went by the pseudonym Ken Fong wrote to the regulator alleging that NSE’s systems were being misused, and that some people consistently enjoyed an advantage to the detriment of others.