NSE awaiting further direction from Sebi on co-location issue

Concerned about any adverse order from Sebi on the controversial co-location issue, NSE today said it has submitted report of an independent agency on the matter to the regulator and is awaiting further direction.
Following complaints about co-location facility of the exchange, a Sebi-appointed committee had initiated an examination and found instances of breach of fair access norms by the exchange. It also noted that NSE provided unfair preferential treatment to some brokers.
Consequently, Securities and Exchange Board of India (Sebi) asked the exchange to conduct an independent forensic examination by an external agency into its co-location facilities and also directed NSE to deposit the revenue generated from co-location in a separate bank account.

"Any adverse Sebi directive on this matter may materially and adversely affect our co-location business, results of operations, business and reputation," NSE said in the Draft Red Herring Prospectus (DRHP) filed with Sebi.
National Stock Exchange (NSE), which submitted the report of the independent agency to Sebi last week, is awaiting further direction from the regulator.
The agency observed that system architecture of NSE with respect to dissemination of Tick-by-Tick (TBT) through TCP/IP (Transmission Control Protocol/Internet Protocol) was prone to manipulation.

The system architecture indicated that data was disseminated in a sequential manner whereby the stock broker who connected first to the server received ticks (market feed) before the stock broker who connected later.

The exchange, in its meeting held on December 19, has taken the report on record and decided to initiate a review of its multicast TBT systems including the processes and procedures, data retention, job rotation, mandatory leave, segregation of duties.
"We have forwarded the report to Sebi on December 23. We have not commented on the observations made by the independent agency in its report," NSE said.
"Additionally, we have also requested Sebi, pursuant to our letter dated December 26 that its decision be communicated to us as early as possible, and that once the decision is taken, to take a view on the decision on the freezing of the revenues accruing to us from the co-location facility," it added.

Following Sebi's direction, NSE has deposited rack (that is the rental for rack space) as well as connectivity charges in respect to the co-location facility. Also, it has deposited transaction charges resulting from the trading activity at the co-location facility.
Accordingly, in addition to the rack and connectivity charges, an amount of Rs 145.52 crore representing the transaction charges on trade orders placed through its co-location facility for the months of September, October and November has been transferred to the separate bank account, it said.