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NSE directors, including board member and vice-chairman Ravi Narain,  received show-cause notices from Sebi last week.  Photo: Ramesh Pathania/Mint
NSE directors, including board member and vice-chairman Ravi Narain, received show-cause notices from Sebi last week. Photo: Ramesh Pathania/Mint

NSE sets up panel to probe charges in algo trading case

The NSE panel has sought responses from 14 officials who received show-cause notices from Sebi

Mumbai: The National Stock Exchange of India (NSE) has formed a committee to look into allegations that some brokers had received unfair access to its algorithmic trading facility.

The panel has sought responses from 14 officials who have received show-cause notices from the Securities and Exchange Board of India (Sebi), said two people with direct knowledge of the matter, including a member of the NSE board.

“The panel which comprises senior management and board representatives has sought explanations from the NSE officials on the allegations that they failed in their fiduciary responsibility. The panel has been formed to fulfil one of the primary directions of Sebi, which has asked NSE to fix responsibility," the board member cited above said on condition of anonymity.

A spokesperson for the NSE said the exchange was working with the regulator for a quick resolution of the matter.

NSE’s internal inquiries are parallel to the investigation by Sebi, which has issued show-cause notices to the NSE and its officials for allegedly violating Securities Exchange and Clearing Corporation (SECC) regulations and Prevention of Fraudulent and Unfair Trade Practices (PFUTP) norms.

Separately it is examining whether these officials had any links with brokers and made illegal monetary gains.

“The panel’s fact-finding exercise will be completed in June. The report would be submitted to the board of NSE and Sebi for next course of action. Action could include suspension, a criminal complaint but it is too early to say," said the second person cited above, also on condition of anonymity.

Last week, Sebi issued show-cause notices to NSE directors including board member and vice-chairman Ravi Narain. The allegations of unfair access being granted to some brokers pertain to 2010-2014, when Narain was serving as chief executive officer and managing director. Narain was succeeded by Chitra Ramkrishna in 2013; she quit the organization in December 2016.

Narain may recuse himself from board functions which pertain to the examination of these allegations. “There are some things in (the) pipeline. The board will adhere to best corporate governance practices for a closure to the matter," said the board member cited above.

The unfair access issue first came to light when a whistle-blower wrote to Sebi that certain brokers were able to log into NSE systems with better hardware specifications while engaged in algorithmic trading, allowing them unfair access and advantage. These allegations were highlighted in a Sebi panel report and a forensic audit report of NSE systems.

NSE, in an explanations to Sebi, has claimed that even if some brokers had gained unfair access, their order-to-trade ratio was very poor to have a material impact.

“(That) the order to trade ratio was poor is sort of irrelevant - that is a bit like saying ‘we robbed a dozen banks but only managed to get cash in one of them’," said Patrick Young, a capital market expert and chief executive officer of crowdfunding platform Hanza Trade.

“One should look for absolute money. Profits in this case, but should assess it by differentiating profits that were made due to ‘advantage’ as opposed to pure conventional profits. Just looking at order-to-trade ratio is disingenuous here as the absolute extra profit which is a windfall gain (of sorts) was made at the expense of another party who did not have the same speed to market," Young added.

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