Mumbai: Two days after the National Stock Exchange of India Ltd (NSE) submitted two forensic audit reports to the markets regulator, the income tax (I-T) department stepped in on Thursday to verify the extent of illegal gains made by some brokers who gained preferential access to the NSE’s high-speed algorithmic trading (algo-trading) platform.

The income tax department in Delhi and its Mumbai arm conducted searches of the premise of stockbrokers and former and current officials of NSE in connection with the controversy, two income tax officials said, requesting anonymity.

A spokesperson for the Central Board of Direct Taxes (CBDT) confirmed the development, without going into details.

“The searches on brokers were to assess or determine ill-gotten assets and wealth arising out of preferential access on NSE’s co-location platform. The former and current NSE officials were raided to determine whether there are unexplained or unreported assets or wealth that were acquired as gratification for providing preferential access. A total of 27 premises have been searched," said an I-T official on the condition of anonymity. A spokesperson for NSE declined to comment.

The searches were conducted on the premises of 15 stockbrokers identified by the markets regulator Securities and Exchange Board of India (Sebi) in its investigation of improprieties in so-called algorithmic trading, said the official cited above, adding that some NSE officials who received showcause notices from Sebi were also raided.

Algorithmic trading refers to the use of electronic systems to execute thousands of orders on the stock exchange in less than a second.

Members who co-locate their servers on the premises of the exchange gain because their orders travel faster, giving them a speed advantage over those who are farther away.

On 22 May, Sebi issued showcause notices to NSE and 14 current and former officials for allegedly failing in their fiduciary duty and allowing a few brokers to take unfair advantage of NSE's algorithmic trading platform and for not cooperating with Sebi during the investigation.

Twelve of these officials and NSE have applied with the regulator to settle the charges by paying a penalty without admission or denial of guilt under the so-called consent mechanism.

The searches came after NSE submitted forensic audits by EY India on NSE’s cash and currency segments and another report by the Hyderabad-based International School of Business (ISB). ISB conducted a study to determine whether any abnormal profits were made as a result of the first log-in to NSE servers by members named in a report by Deloitte Touche Tohmatsu India Llp.

According to two people with direct knowledge of the matter, both the audits have given a clean chit to NSE and its officials.

EY created the trading environment that was prevalent between 2010 to 2014 to address allegations of unfair access, said a person with direct knowledge of the matter.

The forensic audit by EY confirmed that systems were prone to manipulation when NSE was disseminating information one -by -one. The system became robust when NSE moved to broadcasting price information to all members simultaneously, he explained.

ISB’s study on whether brokers had made abnormal gains or whether some NSE officials were in collusion with the brokers was inconclusive, said the second person. NSE declined to comment on the specifics of the audits.

In a statement on 14 November, NSE said that it would not be able to comment on the contents of the reports.

While the market regulator has taken these reports on record, it will rely on the findings of its own forensic audit, said a person familiar with the regulator’s thinking.

Sebi, in August, commissioned a joint forensic audit by Deloitte and EY of the exchange’s algorithmic trading systems to determine whether any illegal gains had been made and whether NSE officials had colluded with the brokers.

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