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Business News/ Market / Stock-market-news/  Was Sebi aware of unfair access allegations at NSE in January 2015?
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Was Sebi aware of unfair access allegations at NSE in January 2015?

Sebi did not initiate an inquiry into the allegations of unfair access at NSE till the end of 2015

The allegations against NSE pertain to members who co-locate their servers on the premises of the exchange. Photo: Hemant Mishra/MintPremium
The allegations against NSE pertain to members who co-locate their servers on the premises of the exchange. Photo: Hemant Mishra/Mint

Mumbai: The markets regulator was aware of allegations that the National Stock Exchange (NSE) gave preferential access to some brokers on its algorithmic trading platform eight to nine months before the watchdog initiated an inquiry, two people aware of the development said.

The Securities and Exchange Board of India (Sebi) had taken cognizance of the complaint at a meeting on 25 February 2015, according to the minutes of the meeting, a copy of which was seen by Mint.

The allegations became public in June 2015, when Moneylife magazine wrote an account based on a whistleblower’s letter. NSE sued Moneylife for defamation in July 2015. The Bombay high court in September 2015 ruled in favour of Moneylife and directed that NSE pay Rs50 lakh in damages to Moneylife.

In the February 2015 meeting, the regulator concluded that inequitable access was a serious concern and it required a basic framework.

“There is an urgent need to have a basic regulatory framework for co-location services," said the notes of the meeting.

Thereafter, Sebi decided to issue a circular with respect to co-location services so as to provide every member fair and equal access.

The latest circular in this regard was issued last week directing inter-connectivity between co-located servers of different exchanges and ensuring equal access.

While Sebi did take a serious view on the need for fair access at NSE’s algorithmic trading platform, it did not initiate an inquiry till the end of 2015, when the regulator referred the allegations to its Technical Advisory Committee (TAC). TAC in its March report had found the exchange guilty of providing unfair access and recommended action against NSE.

A Sebi spokesperson did not respond to a Friday email seeking comments on the delay in starting an inquiry.

According to the two Sebi officials cited above, an investigation is launched only after ensuring that it is not a systemic issue. “We first needed to ensure that the lapses were due to fault at the exchange’s part or due to lack of regulatory framework," said the first Sebi official.

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.

The board of NSE has commissioned a forensic audit of its systems by Deloitte India, as directed by Sebi in September.

NSE has been directed by the market regulator to fix responsibility for the lapses and submit a report to Sebi by early next year.

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ABOUT THE AUTHOR
Jayshree P Upadhyay
Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
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Published: 12 Dec 2016, 01:01 AM IST
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