NSE algo case: After bourse’s top brass, brokers come under SEBI lens

After serving show-cause notices to the National Stock Exchange’s (NSE’s) senior officials in the co-location server case, the focus of the SEBI is now on brokers who made illegal profits by getting preferential access to the exchange’s trading server. Sources familiar with the probe told Moneycontrol that the regulator is looking at getting the trading members to return the profits and also take action against them under the unfair trading practices rules. NSE offers a facility to its trading members whereby they can get faster access to price feeds for a fee by placing their server in the exchange premise. But even within the trading members who had opted for this facility, some brokers were able to get preferential access to the price feed, allegedly in collusion with exchange officials. SEBI has served show-cause notices to 14 officials in all, three from the senior management (two of whom have already left), and 11 senior managers (two of whom have already left). They have been given 21 days to respond. The senior management, who have received the notices, are Ravi Narain, Vice-Chairman and Shareholder Director on the board, Chitra Ramakrishna, ex-Managing Director, Anand Subramanian, ex-Group Operating Officer. Ramakrishna and Subramanian quit in 2016 within a few months of each other. Narain, who was part of the founding team of NSE in the early 90s, is still serving on the board. Senior officials include Ravi Varnasi, Chief of Business Development, Mayur Sindhwad, Chief of Trading Operations, Shankar Sen Banerjee, CTO, Projects, Nandkumar M, Project Leader, GM Shenoy, CTO, NSE Infotech, Ravi Apte, ex-CTO (has quit), Suprabhat Lala, Vice-President, Nagendra Kumar, Chief Business Officer, Debt, Murali S, Umesh Jain, ex-CTO (has quit) Jagdish Joshi (ex-NSE IT, has quit) The violations in co-location trading (also called algo trading in market parlance) happened between 2010 and 2015 and were exposed by a whistle blower who wrote to the SEBI about how some trading members were profiting from a preferential access to price feeds being disseminated by the exchange server. SEBI is of the view that there were serious corporate governance lapses at the exchange and the Key Management Personnel (KMP) will have to answer for them. The regulator has issued notices to the KMP under section 26 (1) (2) of stock and clearing corporation which clearly says “that for any failure by the directors to abide by these regulations or code of ethics or in case of any conflict of interest, either upon a reference from the recognized stock exchange or clearing corporation, can take appropriate action including removal or termination of the appointment of any director, after providing him a reasonable opportunity of being heard”. A source at SEBI said that the issue of preferential access was a clear case of ‘front running’, the only difference being that it was done manipulating technology. In conventional front running, a broker or deal at a broker’s firm buys/sells shares in his personal account before doing the trade in that stock for his client. In the co-location case, brokers with preferential access to the exchange’s servers would get a better rate ahead of the brokers who did not have that advantage. The probe is going on at full steam, and both SEBI and Ministry of Finance are looking at ways to minimize damage to NSE’s reputation. Already, NSE’s initial public offering has been delayed because of the ongoing probe. It is unlikely that the share issue will hit the market before the closure of the co-location case. “A clean-up is required at the earliest as it can otherwise create ambiguity in the minds of investors,” a senior bureaucrat told Moneycontrol. Some of the officials who have got the show-cause notices say that they are being scapegoats while some of those responsible for the mess are not being asked the hard questions. “Neither Deloitte nor SEBI asked us for our version; we have sufficient e-mail records to prove our case,” said one of those who had received the show-cause notice. The SEBI probe is now focusing on the brokers who gained unfairly from the preferential access to the exchange’s trading system. Sources said there are around 15 of them in all. The regulator is going through the trades done by the members between 2010 and 2015 before the loopholes in the system were plugged. Considering there are around 220 trading sessions in a year, these brokers together are estimated to have made a few0000000000 rupees during the five years when they had preferential access. The case had an interesting twist a couple of months ago when OPG Securities—one of the key accused trading members—challenged the NSE to show proof that the firm had been warned for connecting to the wrong server. SEBI is expected to complete the probe over the next months, sources say.