Mumbai: The Securities and Exchange Board of India’s (Sebi’s) technical advisory committee has recommended action against National Stock Exchange of India Ltd (NSE) after finding evidence that some traders on the exchange had unfair access to market data and trading systems.

The committee has also asked the regulator to probe whether there was “collusion" between NSE officials and a trading firm, OPG Securities.

While NSE has consistently dismissed allegations about providing unfair access, the Sebi committee stated in its 15 March meeting at Sebi Bhavan: “It is clear that NSE violated norms of fair access and allowed some brokers to benefit." Mint has reviewed a copy of the minutes of the meeting.

The committee’s findings raise the stakes in an already high-profile case. Last July, the exchange filed a 100 crore defamation case against Moneylife magazine, which published a whistleblower’s letter and an article on unfair access at the exchange.

“Sebi may initiate immediate action for lapses on the part of NSE and exploitations made by OPG under the guidance of the committee. Sebi may constitute a team comprising people with appropriate background to investigate the collusion aspect between NSE officials and OPG," noted the minutes of the committee’s meeting.

The committee discussed the findings of a sub-committee it had set up to study the issue.

The minutes of the meeting said that “in spite of NSE not providing adequate details on the issue, the available data was examined and the report conclusively shows that a broker called OPG Securities logged in consistently to the servers with better hardware specifications". The trading member’s ability to log in to NSE’s systems ahead of others enabled it to succeed in so-called unique multi-legged orders, according to the report. All of this occurred when NSE was still disseminating market data through the transmission control protocol/Internet protocol (TCP/IP) model of communication.

When it introduced the IP multicast model of communication, OPG’s success in unique multi-legged orders came down drastically, according to the report.

Many traders deal in combinations of call options (agreeing to buy a stock at a certain price on a certain date) and put options (agreeing to sell a stock at a certain price on a certain date). A multi-legged order allows them to do this in one order.

In September 2015, when Mint contacted NSE regarding these allegations, the exchange denied that any of its employees connived with any trading member for faster data access and said that the exchange provided fair and equal access to members who are co-located (mintne.ws/1LcAnER).

While NSE did not reply to a detailed questionnaire based on the findings of the Sebi committee, its spokesperson said: “We understand that the third-party report is still at an evaluation stage at various levels and not a final one. Therefore it is premature to offer a comment. However, generally, since technology, risk management parameters etc change over time, such things should be studied keeping in mind the environment, regulatory and general practices prevailing in a connected era. As we have said before, NSE has always followed regulatory guidelines and standard practices."

The report was prepared by a sub-committee constituted by the technical advisory committee. This sub-committee had six Sebi officials and Om Damani, a professor of computer science and engineering at the Indian Institute of Technology, Bombay. In its report, the sub-committee said that the bourse had not provided adequate details to the committee examining the issue.

With algorithmic trading gaining ground in recent times, trading firms that have faster access have an edge over others. The allegations pertain to members who co-locate their servers on the premises of the exchange. Even at these co-located centres, some of the servers themselves might have differing hardware capabilities or workloads.

This first came to light when a whistleblower who went by the pseudonym Ken Fong wrote to the regulator alleging that NSE’s systems were being misused, and that some people consistently enjoyed advantages to the detriment of others. The minutes of Sebi’s technical advisory committee said that it had received three such letters from the whistleblower.

The sub-committee’s report found that technology solutions such as load balancers or randomisers, which could have prevented any one broker from enjoying a continuous advantage, were not present at the exchange. A load balancer distributes workloads across servers. A randomizer changes member positions so that no one broker is consistently first in line.

“…the architecture of NSE…. was prone to manipulation/market abuse. When Sebi requested NSE to investigate this, NSE claimed that their architecture could not be and has not been misused," said the report.

The report also made mention of the use of so-called ‘dark fibre’ by certain trading members in violation of NSE’s own policy norms.

“With regard to the issue of dark fibre, the committee was of the view that in violation of its own policy on allowing only ISPs, NSE allowed non-ISPs like Sampark (Infotainment), to lay fibre in its premises for various members." ISPs refer to Internet service providers.

Dark fibre refers to a dedicated communication line through which messages travel faster than regular lines because of the absence of other traffic. As such, there is nothing illegal about using such faster connectivity infrastructure.

Kunal Nandwani, founder and CEO of algorithmic trading technology provider uTrade Solutions, said that the introduction of dark fibre for algorithmic trading in India is relatively recent, adding that only a handful of entities currently use it here, unlike in the West.

“Dark fibre has been the norm for cross connectivity in the western world (for years), and is used by almost every serious algo / HFT (high-frequency trading) player... (It) is in early stage of adoption within India," he said.

In NSE’s case, however, the allegation made by the whistleblower is that a non-ISP was allowed to provide dark fibre services to a certain trading member.

The allegations regarding dark fibre connectivity were the subject of the whistleblower’s third letter to Sebi that was sent in October 2015. The dark fibre work was for “work pertaining to Way2Wealth and GKN", the sub-committee report said.

According to the whistleblower, Sampark’s services were first used by AlphaGrep, a high-frequency trading firm that is part of the Coffee Day group, which also owns Way2Wealth.

The committee noted in its report that when the whistleblower wrote to NSE, its management had dismissed it and did not initiate any steps to check the possibility of any collusion with the staff of NSE.

Way2Wealth, GKN, and OPG did not respond to calls and emails sent on Friday. Sebi did not respond to an e-mail seeking comment. Sampark declined comment.

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