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The Parliamentary Standing Committee on Finance has directed the Securities and Exchange Board of India (Sebi) to submit a report on alleged malpractices at the National Stock Exchange of India Ltd (NSE) involving allotment of co-location servers and sharing price-sensitive information.

Co-location refers to bourses allowing members to set up automated trading systems on their premises to reduce the time required for orders to flow between the exchange and the broker’s trading system.

At a meeting held last Thursday, the committee asked the capital market watchdog to investigate the matter and submit a report within a couple of weeks, said a member of the committee who spoke on condition of anonymity.

A report on website Indiasamvad on 16 July said that the committee headed by member of Parliament M. Veerappa Moily had told Sebi chairman U.K. Sinha to look into the matter.

An NSE spokesperson said the exchange is not aware of any regulatory probe and has not “received any intimation till now".

The issue was brought to the parliamentary committee’s notice after Moneylife, a personal-finance-focused website, published a letter written by an official of a Singapore-based hedge fund to Sebi.

“I wish to draw your attention to a sophisticated market manipulation done at NSE for several years at NSE co-location. The most shocking aspect is that when the matter came to the knowledge of NSE management team, they have chosen to hush up the matter under the carpet rather than coming out in open against the same," says the letter addressed to B.K. Gupta, deputy general manager, Sebi.

“The market manipulation that I am referring to has been occurring by enabling certain vested brokers to get market price information ahead of the rest of the market and thus enabling them to front-run the rest of the market," it adds.

The stock exchange has denied these charges.

“NSE has filed a defamation suit against an organisation and its representatives who published unsubstantiated and misleading reports against the exchange," said the spokesperson for the exchange, without naming Moneylife. A separate press release from the exchange said that a defamation suit with a claim of 100 crore had been filed in the Mumbai high court.

“As you know since inception, NSE has been maintaining a high degree of surveillance and integrity in its day to day operations, strictly adheres to the rules, regulations and guidelines issued by the regulators from time to time," added the spokesperson in the emailed response.

As per information available on its website, NSE launched co-location facilities in January 2010 and currently charges up to 12 lakh depending on the size of the server with an initial setup charge of 1 lakh.

As per Sebi data, the share of turnover originating from co-location facilities on the NSE increased from 2.3% in April 2010 to 22.6% in December 2014. In June, co-location trades accounted for nearly 25% of the total turnover on NSE, according to data available on the exchange website.

“The increased complexities of algorithm coding and reduction in latency due to faster communication platforms need focused monitoring, as they may pose risks in the form of increased possibilities of error trades and market manipulation," the Reserve Bank of India said in its Financial Stability Report released in late June.

Two months ago, Sebi issued a circular directing exchanges to provide co-location facility in a “fair, transparent and equitable manner" and that all participants should get fair and equal access to data feeds. It also said that all entities availing of co-location facilities should be provided “similar latency." Latency is the technical term used to describe the time lag between placing an order and executing a trade.

These were some of the issues that were highlighted in the letter written by the Singapore-based hedge fund manager to Sebi in January.

Sebi did not respond to a mail seeking comments on the matter.

Market participants say the issue has led to doubts in the minds of many investors who say they are losing out, not due to technology, but because of the undue benefits enjoyed by a certain set of entities.

“It is not that investors have problem with technology but there should be transparency in regulations. There should be a proper public discussion before the rules are framed. We have copied the Western markets by allowing algo and co-location here but the legal redressal systems are much better overseas. Right now, investors have doubts regarding these systems due to lack of transparency and Sebi and exchanges should address that," said Sandeep Shah, member-core committee, Investors’ Grievances Forum, a Sebi-registered investor association.

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