The National Stock Exchange (NSE) will soon appoint an external auditor to examine the alleged unfair trading practices on exchange with respect to high- frequency trade (HFT) or algorithmic trading as directed by the Securities and Exchange Board of India (Sebi), said a source.
The move follows Sebi's letter to NSE Chairman Ashok Chawla on September 9 asking the board to probe undue favors extended to some brokers.
Sebi is believed to have directed NSE to deposit all revenues generated from such practices into an escrow account.
Confirming the development, an NSE spokesperson said, "We will submit a status report within three months, as asked by Sebi. Besides, we are also finalising a third-party auditor to examine the issues raised."
A probe was launched by Sebi's technical advisory committee, which submitted its report in March. According to this report, "The available data was examined and the report conclusively shows that a broker called OPG Securities logged in consistently to the servers with better hardware specifications." However, the committee said the bourse had not provided adequate details.
The report also noted that NSE had violated norms of fair access and allowed some brokers to benefit. It has highlighted the practice of co-location to give advantage to some brokers to trade faster than others.
A co-location centre is a place where computers owned by HFT firms and proprietary traders are housed on the same premises where an exchange's computers are kept.
Based on the report, Sebi had initiated action and sought responses from NSE in April. However, in its response NSE denied the allegations.
Sources said NSE had submitted a status report to Sebi and that it had also conducted a departmental inquiry but did not find anything.
The matter came to light when a whistle-blower from Singapore wrote three letters to the finance ministry and Sebi highlighting the issues.