The National Stock Exchange of India Ltd (NSE) on Thursday sought a settlement with the markets regulator over allegations that it had provided unfair access to its high-frequency trading systems to some brokers.
NSE applied to the Securities and Exchange Board of India (Sebi) for a settlement through the so-called consent mechanism three days after Vikram Limaye took charge as managing director and chief executive officer.
Under the consent mechanism, entities can settle charges by paying a penalty without admission or denial of guilt.
“Sebi will review the application and get back to NSE on the future course of action. NSE will work with Sebi on early resolution of this matter," the exchange said in an emailed statement.
On 22 May, the markets regulator had sent show-cause notices to the bourse and 14 present and former officials over charges of providing some brokers unfair access to its algorithmic, or high-frequency, trading systems that allow thousands of orders to be executed in less than a second. Sebi said the exchange had failed in its fiduciary responsibility.
The terms of consent will be discussed by an internal Sebi panel which comprises the investigating officer, officials of the legal department and the department which issued the show-cause notice.
Once approved, the terms will be sent to an external panel, called High-Powered Advisory Committee. Then the application will be vetted by a panel of Sebi whole-time members before finally being approved or rejected.
NSE took the decision to settle the charges through the consent mechanism at a 7 June board meeting, said a person familiar with the development. The board decided to opt for the route as it was causing reputational damage to the exchange, this person added on condition of anonymity.
The unfair access issue arose in January 2015 when a whistle-blower 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 in the offing. At its latest board meeting, Sebi said it was ordering another probe to find out if the officials involved in the unfair access issue made any illegitimate gains.
“The (consent) regulations do provide discretion to Sebi; however, if Sebi were to exercise discretion then it will have to be uniform in all other cases" of the same nature, said Sumit Agarwal, partner at law firm Suvan Law Advisors. “In such cases, the challenge for the regulator would be to consider duration of the offence and arrive at a settlement amount, especially when the facts are still evolving."
NSE is not leaving the 14 officials in a lurch.
“Existing and former NSE officials who have received show-cause notices from Sebi are being given legal assistance to apply for consent. These applications would be sent separately to the regulator by existing officials in their individual capacity," said the person cited earlier.
“Former officials are also being provided legal aid, but whether they opt for consent or not would be their personal decision," said a second person on condition of anonymity.