NSE officials suppressed information about few brokerages in co-location case

In a key development in the National Stock Exchange (NSE) co-location case, the Securities and Exchange Board of India (SEBI) has found many instances where a few trading members had been caught out misusing the secondary server, but not reprimanded by the exchange, documents in possession of Moneycontrol state. The secondary server is a backup server and to be used only when there is a problem with the primary server. Since the load on the secondary server is less, brokers logging in on the secondary server can access the price feeds faster than those trading members who log in on the primary server. NSE officials had met up with the representatives of these broking firms between 2012 and 2016, but they did not warn the broking firms to stop misusing the secondary server. Moreover, the NSE’s standing committee denied the allegations despite the SEBI-appointed technical advisory committee (TAC) and cross functional team (CFT) pointing out that certain information was deliberately not shared by NSE like the number of internet protocol (IP) addresses being used by the broking firms. SEBI asked NSE’s Vice President of Special Projects, Mahesh Soparkar, whether he had held any meetings with brokerage firms OPG Securities, SMC Global and Universal Broking or any of their associates. In reply, Saporkar said, “Yes I have met the representatives of OPG and SMC. I don’t recall the names of any specific representative from the companies who I met during the period.” However, in an internal NSE investigation about meeting officials from OPG, Saporkar had said, “I would have met [OPG officials] three to four times in NSE. I met Sanjay Gupta along with an NSE official identified as Murli.” The NSE’s VP of special projects’ internal investigation submission read “The variation [in speed of servers] was discovered by us. and redistribution was done on not less than six occasions between January 19, 2011, and January 9, 2012.” He added, “...the redistribution helped crowding which could have benefitted members. and OPG’s IPs [internet protocol addresses] were accommodated in the slots created by redistribution.” In his testimony to SEBI, Aman Kokrady of OPG Securities said that his company had not received any warning from the NSE over using the secondary server between 2012-16. During the period, SEBI, however, noticed his company’s login and turnover increased significantly. Further, SEBI asked the former vice chairman of NSE Ravi Narain about his meeting with OPG on March 2, 2014. He said that he did not recall such a meeting. According to SEBI investigation, Kokrady claimed that he had written to an NSE official in which he mentioned that he met Narain a week earlier and discussed that the production rollout calendar be planned and well communicated and raised concerns about the variation of tick-by-tick (TBT) arrival rates. SEBI’s preliminary findings of the CFT on a complaint pertaining to the co-location case revealed that the exchange did not divulge that more than eight IPs were procured by OPG in January 2012, some of which were used by entities other than OPG. The number of IPs used by OPG were around 11, while other brokerage firms used about one or two IPs to avail tick-by-tick (TBT) data from NSE. During this period, OPG had consistently logged in first on to the server. The CFT highlighted that OPG had hired Nagbhushan R Bhatt from Omnesys “...to figure out which server was performing better...” This fact was supported by Kokrady. Omnesys was part of an NSE subsidiary. Nonetheless, NSE’s standing committee, chaired by Dharmistha Raval, S. Sadagopan, VA Sastry and NL Sarda, was not convinced of CFT or TAC findings. The committee said, “Even if it was known to NSE that a certain member is always first to log in, this would not have resulted in us taking any action to stop this. There is nothing in the system that facilitated this for one member but not others. We feel that the complaint is based on wrong assumptions and perceived advantage of getting tick first. Such a complaint and the analysis is based and driven by the complainant’s assumption as a basis to decide ‘abuse’ is incorrect and harmful to the reputation of the organisation involved here.” The co-location case first surfaced in July 2016 when SEBI ordered a probe, including a forensic examination on NSE’s co-location facility. This followed allegations that few trading members on the NSE made a killing by unfairly gaining faster access to the price feeds with help from some employees. Later, in February 2017, SEBI ordered the forensic audit of cash and currency derivative segments also.