NSE said to be redrafting its algorithmic trading policy

Mumbai: National Stock Exchange of India (NSE) is redrafting its algorithmic trading policy following the findings of a forensic audit that the exchange’s systems were prone to manipulation, two people with direct knowledge of the matter said.

NSE has also hired consulting firm EY to audit the systems that facilitate algorithmic trading.

“This audit is in addition to the Deloitte India forensic audit done last year. This is to ensure that none of NSE’s systems are prone to any manipulation. The audit would focus on NSE’s information (price) dissemination systems,” one of the two people cited above said, requesting anonymity.

An email sent to the NSE spokesperson on Wednesday was not answered. EY declined to comment.

NSE, in its share sale document on 28 December, disclosed that a forensic audit showed that its algorithmic trading platform and co-location facility were “prone to manipulation” and allowed “potential preferential access” to some brokers.

Deloitte India’s audit report observed that consistent preferential access to some brokers may not have been possible without the knowledge of certain NSE officials and employees who didn’t do anything about it.

The report, however, stopped short of calling differential treatment to some brokers “collusion or connivance” because of a lack of email records.

This was in consonance with the findings of Securities and Exchange Board of India’s technical advisory committee (TAC) which prescribed action against NSE. “NSE systems were always strong but now is the time to demonstrate that. The policy is going to focus on how issues of discrepancies will be handled and at what stage it should be brought to the notice of senior management,” said the second person cited above, also requesting anonymity.

For instance, the allegation against brokerage OPG Securities is that it kept logging onto NSE systems first via the less crowded secondary servers while other brokers and traders were using the primary serves. This was highlighted to mid-level management of NSE and in spite of repeated warnings, OPG continued to log on to secondary servers, gaining an advantage over the rest.

Co-location is a facility which allows housing of traders’ servers at the exchange premises. This allows faster access to data feeds and price information released by exchanges. Algorithmic trading or high-frequency trading (HFT) refers to the use of electronic systems which can potentially execute thousands of orders on the stock exchange in less than a second.

“The second audit of NSE systems is to ensure that the multi-cast system to disseminate information is not prone to manipulation,” said the first person.

In addition, NSE is about to start disciplinary proceedings against OPG Securities on allegations that in spite of warnings the brokerage kept logging onto secondary servers and was always the first to log in. According to NSE, this was an attempt to manipulate the systems.

“The brokerage would be given a chance to present its side of events,” the first person cited above said.

Sanjay Gupta, head of OPG Securities, declined to comment.

NSE has always maintained that none of the brokers made any material gain out of the so-called ‘preferential access’.

But Sebi’s investigation in the matter highlighted that some members profited from it and when NSE changed its systems the profits of these entities fell sharply. For instance OPG Securities’s profit rose to Rs11 crore in 2013-14, the period to which the allegations pertain, from Rs1.36 crore in 2012-13.