Mumbai: The National Stock Exchange of India has redrafted its policy for co-location of servers to ensure that processes are properly documented. It is also examining options to take action against those who may have erred in providing allegedly unfair access to its algorithmic trading systems, said two people with direct knowledge of the matter.
Fixing responsibility and strengthening its co-location policy are two pre-conditions before the Securities and Exchange Board of India (Sebi) comes to a final decision on the unfair access issue, said the first person, declining to be named.
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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.
A forensic audit by Deloitte (India) had spoken about the “lack of documentation and laid down policies" in certain aspects of NSE’s algorithmic trading and co-location system. In another instance, it talked about “absence of a specific policy and operating procedure", NSE revealed in its share sale documents.
NSE has plugged these gaps. It has strengthened its systems by ensuring that every aspect related to co-location and high frequency trading is documented, said the second person cited above.
“NSE has always followed a policy to have transparency in all its functions. By strengthening its systems, NSE is just demonstrating that," said the second person. A spokesperson for NSE declined to comment. An email sent to Sebi did not result in a response.
The second pre-condition relates to action against employees without whose knowledge preferential access to some brokers might not have been possible. The Deloitte report had identified 10 such employees, most of whom have left.
NSE is considering whether to file a police complaint against the officials (in case they had malafide intentions) or informing Sebi about these officials if it was just a procedural lapse, said the second person. “The examination is in a very preliminary stage. We are only doing a basic study. Anything final would be decided only after NSE receives the Ernst & Young (EY) forensic audit report," said the second person.
EY is examining NSE’s currency, cash and equity systems and its report is expected by the end of this month or in early June.
It is crucial for NSE to fulfil these conditions to get Sebi’s final decision, which in turn will hasten its initial public offering and also free up cash.