Why Sebi’s silence in the NSE case is dangerous
The closure of the NSE algo-trading case is nowhere in sight
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The whistle-blower who put the spotlight on National Stock Exchange of India Ltd’s (NSE) algorithmic trading practices and policies is pleased with Securities and Exchange Board of India’s (Sebi) action on the complaints.
“I am glad to note that finally some action has taken place on the complaints,” he wrote in a letter dated 14 February to Sebi. He is presumably referring to the changes in the board as well as the top management at the exchange, besides findings by a third party auditor that confirmed some of the complaints in his letters.
The closure of the case, however, is nowhere in sight. According to reports, Sebi’s investigations continue, with notices going out to a host of brokers who allegedly benefitted from lapses at the exchange. Meanwhile, based on Sebi’s directions, NSE has been setting aside revenue it generates from co-location services. It started doing this in September 2016, and its initial public offering (IPO) prospectus suggests monthly revenue from co-location services coupled with transaction charges linked to co-located servers amount to around Rs55 crore per month.
In financial year 2015-16, NSE’s pre-tax profit stood at roughly Rs80 crore per month. Until Sebi brings closure to the case, a large chunk of NSE’s profits are at risk. And note that this is a company that is supposed to be gearing for an initial public offering of shares. The IPO looks a clear non-starter, until the regulator gets its act together.
Not that the regulator owes the exchange a speedy listing; but it does owe market participants in general speedy investigations and well-argued orders. As pointed out earlier in this column, Sebi has been traditionally reticent when it comes to pulling up stock exchanges, based on a view that this would hit the markets’ confidence in the stock markets. This Mint article even suggests a weird thought process within the regulator that NSE may be asked to take corrective action on its own.
But in truth, the lack of clear action, backed by a well-articulated order by the regulator, is leading to all forms of rumours and interpretations. So far, Sebi seems to have preferred to play a behind-the-scenes role in addressing concerns raised in the whistle-blower’s earlier letters. It’s time it broke its silence and put out its judgment, one way or the other.
NSE, meanwhile, has woken up to the possibility that it hadn’t done enough against the alleged infraction by one of its trading members, and has written to the member for an explanation for his missteps despite warnings. The said member, in turn, has dragged the exchange to the court, saying he never received any warnings. The exchange’s new chief executive officer, Vikram Limaye, has a great opportunity to set past wrongs right and start on a clean slate. Of course, Sebi approval for his appointment is still awaited, according to reports, and he is yet to join the exchange. But when he does, he should seriously consider wearing the hat of a public sector bank chairman and write off “NPAs” (non-performing assets) created by previous regimes.
The exchange may claim that it has strengthened processes and policies related to algorithmic trading and use of its co-location services. But not everyone is convinced; the whistle-blower, for one, continues to point out faults in the exchange’s systems. Limaye should have no qualms calling out the shortcomings of the past and pointing to the ways they have been addressed.
More importantly, Sebi and NSE should release the findings of their investigations in these cases.
Referring to the investigations, J.R. Varma a professor of finance and accounting at IIM Ahmedabad said in a blog post earlier this year, “All the documents whose existence has now been disclosed represent material information about the operation of one of India’s most critical financial market infrastructure. These documents ought to have been disclosed long ago, but it is still not too late for the regulator to release suitably redacted versions of all these documents.”
Interestingly, late last week, Sebi issued an order against Reliance Industries Ltd, almost eight years after it had issued a show cause notice to the firm.
One reaction to this can be to get despondent about the time taken for Sebi’s investigations. Another is to turn hopeful, based on the view that the new Sebi chairman means business. Hopefully, the new chairman lives up to these expectations.