Fresh attempt made at settling NSE's TAP regulatory investigation

Bourse, employees filed fresh application with Sebi in May: NSDL disclosure

The National Stock Exchange (NSE) has made a fresh attempt at settling a regulatory investigation into the misuse of Trading Access Point (TAP) software at the bourse.

The Securities and Exchange Board of India (Sebi) rejected a similar application in 2022.
 

“NSE and its employees have filed a consolidated settlement application dated May 4, 2023, with Sebi. The matter is currently pending,” said a disclosure made in the documents that the National Securities Depository Limited (NSDL) filed with Sebi.

The company provided information as part of a disclosure on litigation involving group companies. The NSE holds a 24 per cent stake in NSDL. TAP is a connectivity software developed by the NSE.

It was designed to support data services and messaging on exchange platforms. It was reportedly misused by high frequency traders to gain an unfair advantage over others trading on the exchange platform.
 

The traders avoided paying NSE its transaction fee by using a workaround, according to a report in the Economic Times, which added that income tax officials found out in 2017 during their investigation of the co-location scandal. The bourse appointed a retired judge to look into the matter, according to the report, whose 2021 probe formed the basis of the regulator’s show-cause notice.
 

The NSE had previously disclosed that it had attempted a settlement which the regulator rejected in 2022, according to the last annual report for 2021-22.  
 

“….in terms of the Sebi Settlement Regulations, 2018, (the NSE) filed a settlement application with Sebi on January 13, 2022. Sebi vide its letter dated April 21, 2022 has returned the settlement application filed by NSE in light of pending investigation,” it said. The earlier note had suggested that the matter pertained to 2013.
 

“NSE has not received any show cause notice from Sebi in relation to the Trading Access Point (TAP) matter which pertains to 2013,” said the 2021-22 annual report.
 

The latest NSDL disclosure noted violations of regulations covering prohibition of fraudulent and unfair trade practices relating to securities market probed till November 2020, in addition to cyber security circular violations and securities contract regulation violations.
 

“NSE and certain of its employees were in receipt of a show-cause notice dated February 28, 2023 alleging violations of regulations, and the circular dated July 06, 2015 on Cyber Security and Cyber Resilience framework of Stock Exchanges, Clearing Corporation and Depositories …in relation to trading access point and certain unfair trade practices for a period from November 2013 to November 2020,” it said.
 

The NSE has faced a probe into unfair access to exchange servers for algorithmic traders who used its co-location facilities. Co-location allows algorithmic traders, who buy and sell shares in fractions of a second, to more quickly get their orders to the exchange.
 

Some bypassed safeguards to gain an unfair advantage over others. The matters are currently pending. Other pending matters mentioned in the NSDL filings include cases related to NSE’s oversight of the fraud at Karvy Stock Broking, and a regulatory probe into NSE’s diversification into unrelated businesses.

An email sent to the regulator and the NSE did not immediately receive a reply.
 

Seeking closure 

 

• TAP is a connectivity software
• It was allegedly misused for preferential access by certain traders
• The traders avoided paying NSE its transaction fee by using a workaround
• The NSE sought a settlement in 2022, which was rejected by the markets regulator
• NSE has been investigated for preferential access from its co-location facilities
• Co-location matter remains pending