Among the multiple angles investigated by the stock market regulator in the National Stock Exchange of India Ltd (NSE) co-location case, one pertains to the alleged misuse of exchange data for commercial gains.

In one of the five orders it put out after a four-year-long investigation, the Securities and Exchange Board of India (Sebi) said Ajay Shah, a senior academic with the government think-tank National Institute of Public Finance and Policy (NIPFP), along with his wife and sister-in-law, misused market data obtained from the NSE for commercial gains.

Sebi has held that Shah, along with his sister-in-law and an NSE official, “have collusively worked to fulfil their commercial goals by fraudulently using the data that was obtained by them from NSE to develop an algo trading software and products". This trading software was used for sale to market participants for dealing in the securities market. Some of these products were allegedly used by firms for unfair access to NSE’s systems.

In response to a query, Shah said in an emailed response that he was very disappointed with the order. “The order is not supported by facts. The data in question was never misused. I have no more comments at this point."

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Sebi charged Shah with violating Sebi’s Prevention of Fraud and Unfair Trade (PFUTP) norms and barred him from having association with any market infrastructure institute, listed company or registered intermediary for a period of two years.

The order, however, did not go into whether any financial gain was made by the alleged misuse of the NSE data.

“To my mind, there should be parallel adjudicating proceedings to delve into monetary gains and for imposition of penalties. The order has not dealt with issues of conflict of interest and lapses by the NSE board," said Deepika Vijay Sawhney, advocate, Corporate Professionals, a law firm.

According to Sebi, this is how the alleged misdemeanour unfolded: The NSE had engaged the services of Infotech Financial Services Pvt. Ltd to build a liquidity index or LIX. This project, according to Sebi’s 40-page order, “involved inherent conflict of interest". One of the directors at Infotech was Sunita Thomas, Shah’s sister-in-law, and wife of Suprabhat Lala, assistant vice-president, NSE.

Shah, who was on the board of National Securities Clearing Corp. Ltd in August 2012, failed to disclose this conflict of interest to NSE and its officials, the Sebi order said. This conflict of interest was ignored by Lala when the LIX project was awarded to Infotech.

Sebi also directed Lala, Thomas and Infotech not to associate with the securities markets. Infotech and its two directors, which includes Thomas, have been barred from providing services to any Sebi-registered entity for two years. Lala has also been barred for two years.

"The LIX proof of concept project was a research project that NSE contracted to do with Infotech Financials. 'Colluded' is not the right word to use. We worked along with Ajay Shah who was one of the researchers on the project. The project did not require 'seamless data transmission'. We were provided anonymised historical price data by NSE since it was required for the project, the contents of which was a subset of that available normally with any trading member," said Sunita Thomas, director, Infotech.

"We had developed our software as early as 2005 and the LIX project was done in 2009-10 so the statement that we used this data to develop our algo-trading platform is wrong. Also, our product Chanakya is a algorithmic trading platform with no pre-built strategies. Since we don't have our own strategies, historical data is not required. Our clients, which include trading members, get their proprietary strategies developed on this platform and test it at their own offices which has realtime data, which is far broader in content, so that statement was factually not right. None of brokerage firms named in the orders are clients of our trading platform," she added.

NSE managing director and chief executive officer Vikram Limaye said in an interview on Tuesday that for employee-related matters (Lala) the exchange is exploring legal options.

“The examination conducted by Sebi revealed that trading data that was received by Infotech from NSE for research in the LIX project was being misused for developing algorithm trading products," said S.K. Mohanty, whole time member, Sebi, in the order.

Shah, however, said there was no conflict of interest or connection between building an index and an algorithmic trading platform.

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