Mumbai: Forensic analysis shows 62 broking firms may have enjoyed preferential access to servers of National Stock Exchange of India Ltd (NSE), and not just the three that have been served showcause notices. This is according to three forensic audit reports by EY India Ltd, Deloitte Touche Tohmatsu India Llp and International School of Business (ISB). Mint reviewed excerpts of these reports.
The case pertains to some broking firms having preferential access to NSE’s high-speed algorithmic trading platform through its co-location service. The Securities and Exchange Board of India (Sebi) has so far issued show-cause notices to only three—OPG Securities, its associate GKN Securities and Way2Wealth Brokers Pvt Ltd.
The reports show the average turnover and profits of these 62 brokerages were higher during 2010-14, when they were supposed to have got unfair access and went down when NSE strengthened its infrastructure. To be sure, the profits could have also increased as a function of their trading decisions and calls.
Before 2014, NSE disseminated market data through the TCP/IP model. When it introduced the IP multicast model, profits of these firms fell, or losses worsened. In certain cases, losses rose when infrastructure was changed, the reports said.
An email sent to Sebi remained unanswered. An NSE spokesperson declined to comment citing regulatory reasons.
The reports name, among others, Motilal Oswal Securities Ltd, SMC Global Securities Ltd, Religare Securities Ltd, IKM Investors Pvt Ltd, Kotak Securities, Barclays and Goldman Sachs. Mint is naming those which gained the most and have bigger turnover and volumes.
“All these firms were hitting the less crowded secondary servers for faster access to market information and made profits due to the said access," said a person aware of the matter, declining to be named.
Sebi is now probing if these firms violated fraudulent and unfair trade practices norms, he added. “Sebi will try to determine whether these firms were violating norms with intent or these were inadvertent lapses. Also, whether NSE detected these lapses and placed curative and preventive measures," said this person.
In 2017-18, NSE referred some of these firms to its disciplinary action committee, said a second person, declining to be named.
“Some of these were inadvertent errors as the primary servers in 2012 were giving some glitches and thus, brokers were asked to connect to secondary servers," the second person said.
According to the Deloitte report, SMC Global continued to hit secondary servers despite NSE’s warnings. As per ISB, intraday profits for proprietary trades fell from ₹ 4.7 crore to ₹ 3.7 crore when NSE strengthened systems. NSE’s DAC had given a clean chit to SMC in September 2017. “The various figures and calculations given by you in your email, no profit & loss figures have ever been calculated and communicated to us and are factually not correct and is without any basis," said a spokesperson for SMC global in an emailed response.
For Motilal Oswal, the average overnight loss rose from ₹ 2.3 lakh to ₹ 32 lakh after strengthening of NSE systems. A spokesperson said the brokerage has not received any communication from the regulator or the exchange.
Religare’s profits reduced marginally from ₹ 135 crore to ₹ 113 crore. Kotak Securities’s total intra-day profit of ₹ 463.64 crore between 2010 and 2014 fell to a meagre ₹ 6.49 crore post 2014. Kotak Group’s chief spokesperson Rohit Rao said in an emailed response, “NSE offers co-location facility to all its member brokers. A large number of member brokers, including Kotak Securities have been using the same. In the normal course of business, Kotak Securities has been using NSE approved vendor’s computer-to-computer link (CTCL) software to access NSE’s trading platform from co-location facility. We are not privy to the contents of the Deloitte report that you are referring to and we are not aware of our position in the queue in connecting to the exchange, as this information is not shared with members. Further, we have not received any letter from any of the regulators seeking information on this account."
For Goldman Sachs India, profits fell from ₹ 90.74 crore to ₹ 1.98 crore post 2014. The firm did not respond to queries.
Barclays’ (India) intraday profits shrank by 15 times after the NSE systems were changed. A spokesperson for Barclays said, “We respectfully decline comment on your email. As regards regulatory matters, we always cooperate fully with our regulators, and render such assistance as we are able to provide to them."