Mumbai: Two of the 14 officials of the National Stock Exchange of India (NSE) who received a show cause notice from the capital markets regulator for their alleged involvement in providing unfair access to some brokers have refuted the charges.

The others, including the bourse itself, have applied to the Securities and Exchange Board of India (Sebi) to settle charges by paying a penalty and without admission or denial of guilt. 

Umesh Jain, NSE’s former chief of technology and Subramanian Anand, former chief operating officer, have denied the charges in their response to the show cause notice, three people who have seen the replies said on condition of anonymity.

Jain has said he cannot be held liable for any possible irregularities regarding NSE’s technology because the allegations do not refer to a period when he was heading the technology department at NSE, said one of the three people cited earlier.

The allegations pertain to NSE’s co-location system architecture before the financial year 2014, while according to NSE’s 2013-14 annual report, Jain was made the head of technology in the financial year 2014.

According to NSE’s 2012 annual report, Jain had joined NSE as a senior vice-president on 3 September 2012. 

When contacted, Jain said, “I have not opted for consent and have replied to Sebi." He did not comment further.

Anand’s reply said he cannot be held responsible for any alleged irregularities at NSE’s co-location facility since he was not a key management personnel (KMP), said the first person. KMP include officials who take key business decisions and are appointed by boards.

“Even though he was originally appointed as the chief strategic adviser in 2013, and later appointed as NSE’s group chief operating officer in 2015, he cannot be considered as a KMP since he was appointed as a consultant on a contractual basis and this fact is mentioned clearly in NSE’s annual reports as well," said the person cited above. 

Sebi’s show cause notice accused NSE and its KMP of carelessness with regards to the exchange’s algorithmic trading facility. The notice said that NSE’s tick-by-tick system allowed certain brokers to connect through multiple internet protocols to get price advantage over other trading on NSE’s algo platform; some brokers had direct, unfair access to NSE servers with low trade traffic, which gave them a bigger price advantage. 

The notice alleges the exchange neither had any standard operating procedure for allocation of members to co-located servers, nor any clear policy regarding the tick-by-tick system. Operations in this regard were carried out on the basis of oral instructions from senior officials, making the system vulnerable to manipulation.

The notice mentions that the NSE management had dismissed charges made by the whistleblower. And then, following the findings by Deloitte’s forensic audit and by Sebi’s technical advisory committee, Sebi asked the KMPs of NSE to explain the basis of their denial of the charges made by the whistleblower.

Further, the show cause mentions that NSE’s employees, including KMPs, did not cooperate with Sebi and the forensic auditor (Deloitte) and failed to provide the requisite information sought by Sebi.

Sebi’s show cause has also referred to possible undue gains by certain individuals, adding that OPG Securities was one of the trading members that gained significantly by misusing NSE’s co-location systems.

According to Sebi, NSE changed its co-location systems and moved to a new multicast system, under which data packets reached all co-location participants at the same point of time.

Anand has also stated in his reply that he has only acted as per the information shared with him by the people working under him and as per the directions given by his seniors at NSE, said the first person. 

Anand could not be contacted. Emails sent to Sebi and NSE on 27 September remained unanswered. 

“There are two sets of allegations pertaining to Umesh Jain. One set is pre-dated and the other is post-dated to him being the in-charge of NSE’s technical department. This is a part of his response to Sebi," said the second of the three persons cited earlier. 

Pre-dated allegations pertain to technology lapses; post-dated ones are NSE employees’ non-cooperation with Sebi investigations.

Jain was the head of technology in financial year 2014 and NSE had shifted to a multi-cast information dissemination system, in the same year, which was not prone to manipulation. 

“Jain had left NSE in 2015 and Sebi started investigating the lapses only in 2016, so the question of him not cooperating with investigations does not arise," the second person added. 

The unfair access issue arose in January 2015 when a whistleblower first wrote to Sebi that NSE’s systems were prone to manipulation and allowed certain brokers to access NSE systems with better hardware specifications.

Since then, multiple panels have examined the issue and at least two forensic audits have taken place, with another underway. The ongoing audit, which follows a Sebi board meeting in August, is to figure out if any NSE official acted in collusion with any broker to make illegitimate gains by misusing NSE’s co-location server.

The alleged manipulation of NSE’s algorithmic trading systems took place between 2011 and 2014, but it came to Sebi’s notice only after several alerts were sent to the regulator by a whistleblower in 2015.

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