BackNSE’s own goal and a hurrah for more transparency
It's high time the exchanges realised that increased transparency will result in greater public confidence in their institutions
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It’s interesting how things, sometimes, come full circle. The National Stock Exchange of India Ltd (NSE), which prides itself for bringing transparency to India’s capital markets, was lambasted by a judge of the Bombay high court for, among other things, a lack of transparency.
Hopefully, this will serve as a wake-up call for India’s stock exchanges and their regulator for increased transparency.
For perspective, here’s why the exchange has itself to blame for inviting the wrath of the high court judge. Sucheta Dalal, managing editor at Moneylife, had approached the NSE for its response to a whistleblower’s complaint. Not only did it not respond to Dalal, but it subsequently filed a defamation case against her and Moneylife for publishing the allegations made by the whistleblower. The judge, Justice G.S. Patel, said in his order that the exchange may have had a case, if it had responded to Dalal, and provided that the allegations had been published without further investigations, as if no response had been received.
A similar letter had been sent to the chairman of the Securities and Exchange Board of India (Sebi), and a reading of the court order suggests that he didn’t respond either. But he escaped the ire of the judge for the obvious reason that he hadn’t filed a defamation suit. Put simply, choosing to not respond, and then filing a defamation suit is riding one’s luck too far. It’s hardly surprising that the NSE has ended up with an own goal of sorts. The exchange had sought 100 crore in damages, but instead the judge slapped it with a penalty of 50 lakh.
Of course, this is not to suggest that it’s all right for stock exchanges or the regulator to not respond to the media’s queries, as long as they don’t file defamation suits. On the contrary, it’s high time they realised that increased transparency will result in greater public confidence in their institutions.
Justice Patel rightly said in his order, “The NSE is after all a public institution and it is, in some sense or the other, a custodian—if not of public funds, then at least of an undeniable public trust. This demands, I think, the most complete transparency, accountability and openness in its actions, dealing and operations. I include in this its duty to respond in a measured fashion to a question that has been placed in a measured fashion."
This is amply evident from the case at hand. The whistleblower had complained about how some trading members had derived unfair advantages over others by conniving with some employees of NSE’s data centre. NSE has now denied this, after being silent on the allegations for months.
It must be appreciated that high frequency trading and co-location already suffer from bad press and public mistrust. If stock exchanges and the regulator believe that the concerns are overblown, and that areas of potential conflict have already been addressed, then the way forward is to openly communicate on these matters. By being silent, they just reinforce the general belief that the exchange trading space has become really murky.
The silver lining in all this is that Justice Patel’s rap on the knuckles appears to be helping. Last week, NSE responded to a list of queries on the allegations by Business Standard. The exchange’s response to Mint’s queries can be found here: https://mintne.ws/1LcAnER. But even after these responses and long conversations with a market microstructure expert and a former chief technology officer, I find that we’re none the wiser about the whistleblower’s complaints.
NSE has denied wrongdoing on the part of any of its employees, and its response suggests that it’s not possible for one trading member to have an unfair advantage over others on a consistent basis. Of course, market speculation suggests, as does the original complaint, that this did occur in the past, although changes in technology have subsequently nullified it. Even though some market participants may remain suspicious, a clear, early response from the exchange would have given the picture that it has nothing to hide. Indeed, one of the observations made by Justice Patel was that NSE’s silence could be seen as an admission of truth in the allegations.
As the whistleblower suggested in his letter to Sebi, the only way to find out is to go to server logs and look at time stamps of traded data to ascertain whether one or more trading members were regularly ahead of others in receiving and sending data to the exchange’s servers. Has Sebi done this? We don’t know; because, of course, it has been silent on the issue.
A former Sebi official had once told me that when the regulator receives complaints against exchanges and even discovers infractions, it chooses to stay silent on nearly all occasions. The reason given was that public confidence may be eroded if it is discovered that exchanges are flouting regulations either in law or in spirit. But this is far from the truth. On the contrary, the lack of transparency has done much harm to public confidence in India’s stock markets. Sebi will do well to make its investigation in the matter public; of course, if any.
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