Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Sebi finds some more brokers gained unfair access to NSE systems

Sebi to conduct fresh probe of brokers, separate from NSE's own audit of its algorithmic trading systems

The Securities and Exchange Board of India (Sebi) will start a fresh inspection of the books of some brokers to examine if they got unfair access to National Stock Exchange of India (NSE) co-location servers for algorithmic trading, said two people aware of the development, including an official with the regulator. 

The regulator has decided to conduct this special inspection after it found evidence that as many as 12 brokers might have got unfair access; a whistle-blower had earlier named just three brokers. 

This is separate from NSE’s audit of its own algo systems which Sebi ordered after a technical advisory committee found instances of violation of fair access, one of the two persons cited above said. The NSE board has appointed Deloitte India to probe these allegations. 

“Sebi investigation, coupled with findings of the technical advisory committee (TAC), point to around 10-12 brokers who were able to exploit NSE's system for unfair access," said the first person. 

He didn’t reveal the names of these trading members. 

“Sebi has decided to order a special inspection of these members to gauge the extent of the illicit gains. These members may face suspension at a later stage if found guilty," said the Sebi official, the second of the two people cited earlier. 

“Audit of NSE’s systems would be tabled before its board, which will then form a report and submit it to Sebi. Sebi’s directive in September to NSE board was more to rule out any possibility of collusion between NSE officials and brokers," the Sebi official added. 

A spokesperson for NSE said the exchange was not aware of the new development. “NSE doesn’t want to comment on speculations. We have not heard of this before and seems to be pure conjecture," an NSE spokesperson said in an emailed response. 

An email sent to a Sebi spokesperson was not answered. 

The matter of unfair access started when a whistle-blower wrote to Moneylife magazine, NSE and Sebi alleging that a broker, OPG Securities, gained unfair access while trading on NSE’s algorithmic trading platform.

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

The allegations against NSE pertain to members who co-locate their servers on the premises of the exchange. This reduces the time it takes for an order to travel to the exchange, giving them a speed advantage over those who are farther away. 

Following the allegations Sebi’s TAC appointed a sub-committee to examine the allegations and submit a report. In a report submitted to Sebi in March, the panel concluded that Delhi-based OPG Securities was able to log in consistently to the servers with better hardware specifications. The panel mentioned certain irregularities by brokerages AlphaGrep, a high-frequency trading firm that is part of the Coffee Day group, which also owns Way2Wealth and another trading member GKN on use of dark fibre technology provided by Sampark (Infotainment). 

Dark fibre refers to a dedicated communication line through which messages travel faster than regular lines because of the absence of other traffic.

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