Sebi board to take stock of NSE co-location case

Capital markets regulator Sebi will soon update its board about the status of the ongoing probe into the NSE co-location issue, even as the exchange has submitted data suggesting absence of any monetary gains to any broker from the alleged preferential access.
As the case relates to India's largest exchange in terms of securities market turnover, a detailed status report on the NSE co-location matter will come up before the Sebi board for the second consecutive meeting when it is held on April 26. The matter was last discussed by the Sebi board in February.
Sebi began probing the matter in early 2015 after getting three complaints about some brokers allegedly getting preferential access through co-location facility, early login and 'dark fibre' -- which can allow a trader a split-second faster access to datafeed of an exchange. Even a split-second faster access can yield huge gains for a trader.

While detailed queries sent to NSE remained unanswered, sources said the exchange has submitted data to Sebi suggesting that no monetary benefits were available to anyone due to this facility and the conversion rate of the concerned broker was in fact worse than the average market rate despite the access to the so-called faster facility.
Sources in the exchange also claimed that none of the two separate forensic audits have validated that the concerned erstwhile systems, which have been replaced since then, provided any monetary benefits to anyone and no malafide has been established.
While one audit was done by Deloitte for equity derivatives, another audit by EY into cash markets and currency derivative platforms of the NSE is still underway.

On the cases and 'possible lapses' flagged in the Deloitte report, including about some former employees, days before quitting, telling the audit team about 'oral instructions' from their seniors on server allocations, the exchange sources maintained that all necessary measures have been taken to address all the issues and the regulator has also been informed about the same.

Sources maintained that the NSE feels an advantage of two micro-seconds was too small for any monetary benefit and the systems have as such been made much more robust to ward off any kind of manipulation possibility.
According to sources, NSE's co-location turnover in cash market (daily average gross turnover) has actually increased by almost one-third since the pre-complaint period, while the turnover in equity derivatives has increased even more.

The number of full racks taken has also increased by more than one-third, while that of half racks has almost doubled from December 2014 levels.
While the forensic audit, as also the findings of Sebi's expert committee, had flagged allegations of collusion of certain NSE employees and stock brokers, sources said one concerned employee left the exchange in 2014.
Besides, the NSE was taking all necessary action, including against the concerned brokers on conclusive evidence of any collusion or manipulation, sources maintained.
After taking into account various findings, Sebi had asked NSE to present a "comprehensive action plan" to address the issues and findings in the forensic auditor's report as also the roadmap and action plan on technological and process changes required at the exchange.

The exchange has submitted its report to Sebi.
Sebi has already asked all stock exchanges, including NSE, to strengthen their trading infrastructure and allow direct connectivity between servers of a stock broker placed in co-location facilities of various exchanges, among other necessary actions.