Off late NSE that is the National Stock Exchange of India is surrounded by a lot of scams and scandals. From system lapse to employee misconduct, the biggest Indian stock exchange is hit by a storm. Here, in this article, we would share all about the Co-Location scandal at NSE, which has unfolded so many things.
Explained: What is the NSE Co-Location Scam?
Stockbrokers have access to the price feed from the NSE server. So, in order to get information from the exchange, the broker server has to connect with the NSE server.
Now in 2010, NSE introduced what is known as the co-facility where a broker could place his server right next to the exchange’s server. The closer the broker’s server, the faster the price information will travel and if the broker’s server is a bit far then it would take much time to access the information.
However, there is no controversy here in this aspect – you pay a fee and get the slot. The issue lies in another aspect.
Allegation 1 – Certain Brokers Were Given Unfair Access to Trade Fast
NSE servers carried different loads where some servers were more crowded or more members logged on to that server. Therefore, the dissemination of information was slightly slow and there was a slight lag. In addition, the servers were switched on at different times, however, as per the allegations certain brokers knew which server would be switched on at what time.
So, these brokers would quickly queue up before the server was switched on. This enabled them to get the data first before others could do in the co-location facility.
This privileged access allowed the algo trades of these brokers to be way ahead of others in the order execution.
Also Read: 5 Best Algorithmic Trading Strategies for Beginners
Allegation 2 – Certain Brokers Were Given Access Even to the Inaccessible Backup Server
Now, NSE has a backup server that is activated only when the primary servers don’t work and brokers are very clearly told that they cannot access the backup server. However, it seems that certain brokers would access the backup server and could get access to stock exchange feeds much faster because of which they were at an advantage to other brokers.
Yes, according to the SEBI order, many brokers tried logging on to the backup server. Although most brokers were warned, some complied but some brokers did not. They continued to access the backup server which had the least load because of which they could get access to the price feed much faster.
Ideally, if the primary servers are working you shouldn’t be connecting to the backup server but that’s exactly what they were doing repeatedly – connecting to the backup server getting access to the price suite much faster, and then being able to trade ahead of others. It’s just a matter of a few milliseconds however in high-frequency trades whereby the algos shoot off rapid buy orders, it’s very important that you’re able to catch the buy or sell orders quickly enough to be able to gain from it.
How Did the NSE Scam Happen? Who Were the Beneficiaries of NSE Co-Location Scam?
Going by the SEBI investigation, NSE employees aided the brokers. The main beneficiary broker who could get early access was OPG Securities along with 21 others including Motilal Oswal, Religare Securities, Alpha Grep, JM Global, SMC Global, Kredent, Mansukh Stock Brokers, Barclays Securities, Pace, NYCE, DE Shaw, Indus Broking, Crimson, AB Financial, Advent and Quant Broking.
According to the forensic audit reports by EY India, ISB, and Deloitte Touche Tohmatsu LLP, 62 brokerage houses have enjoyed special access through NSE’s HFT platform. However, at present SEBI has only served the show cause notice to 3 firms – OPG securities, its associate firm Way2Wealth, and GKN securities. According to the report, OPG securities have earned Rs 250 million profits due to this special access from 2010 to 2014.
Who are the Accused in the NSE Co-Location Fraud Case? The NSE Employees that Led the Fraud?
SEBI has charged Ravi Narain, Chitra Ramkrishna, Ravi Varanasi, Anand Subramanian, and Ravi Apte along with others with charges of fraud, violation of the SEBI Act, and Securities Contract and Regulations Act. While Chitra Ramakrishna and Ravi Narain are the ex-CEO and managing directors of NSE, Anand Subramanian is the former GOO (Group operating officer) that Ramkrishna had appointed and Ravi Apte is the ex-technology head. Ravi Varanasi is the current Chief Business Development Officer.
Also Read: Things you Need to Know about Stock Market Investing Before you Start Trading
When did the Co-Location NSE Scam Come into Light?
The NSE Co-Location Scam first came into light when NSE filed a defamation suit of 1 billion against Moneylife at the Bombay High Court in July 2015 for their reporting alleging NSE officials leaking sensitive data. The journalists that covered the investigation were Sucheta Dalal and Debashis Basu. However, Bombay High Court not only dismissed the case but also asked NSE to pay 1,50,000 individually to both the journalists. The court also imposed a penalty of 47 Lakh to NSE and asked them to pay the amount in the form of donations to Tata Memorial Hospital and Masina Hospital.
The reporting was done based on the complaint filed by a whistle-blower, an official in a Singapore-based hedge fund to SEBI’s Technical Advisory Committee. Later a forensic audit was conducted by Deloitte Touche Tohmatsu LLP on the orders of NSE board members. It was this report of December 2016 that revealed how NSE’s tick-by-tick (TBT) system was prone to manipulation and some stockbrokers even obtained preferential access to servers.
The Chitra Ramkrishna – Himalaya Yogi Controversy Came into Light with the Co-Location Scam at NSE
The investigations, audits, and scrutinization in this case actually lead to the link between Chitra Ramkrishna and the Himalayan Yogi where it was seen the ex-CEO sharing and revealing all these things along with NSE operations – breaking several compliances and policies.
The entire NSE co-location scam certainly raises questions against governance and system lapse in the biggest stock exchange of India.
