NSE algo trading: Sebi begins audit of 15 brokers over unfair access

Mumbai: The Securities and Exchange Board of India (Sebi) has started a special audit of 15 brokers who allegedly got unfair access to the algorithmic trading systems at the National Stock Exchange of India (NSE) to determine the extent of unlawful gains they may have made, according to three people with direct knowledge of the development.

These brokers have been named in an earlier Sebi investigation and also a forensic audit done by Deloitte India for NSE. It comes at a time when NSE has launched disciplinary proceedings against one of the 15, OPG Securities Pvt. Ltd. Mint is refraining from naming the other 14 since disciplinary proceedings haven’t been launched against them yet.

Algorithmic trading, or high-frequency trading (HFT), refers to the use of electronic systems to execute thousands of orders on a stock exchange in less than a second. The allegations against NSE pertain to the bourse granting preferential access to some members (among the many) whose servers were located on the premises of the exchange. The Deloitte report had identified 10 NSE employees (most of whom have left) who may have given these preferential treatment to some brokers.

An NSE spokesperson declined to comment.

“Some of these 15 brokers were doing first log-ins to NSE systems through secondary servers which got them faster access to price information,” said one of the three people named above. All requested anonymity.

OPG Securities was consistently able to get the maximum number of first log-ins ahead of the others, this person said.

A few other brokers among these 15 misused dark fibre technology, said the second of the three people cited earlier. Dark fibre refers to a dedicated communication line through which messages travel faster than regular lines because of the absence of other traffic.

Mint had reported on 5 April that ‘dark fibre’ used by certain trading members was in violation of NSE’s own policy, citing a report by Sebi’s technical advisory committee which had first investigated the matter.

Sebi’s new audit also assumes importance since the regulator and NSE have not been able to establish that these brokers made financial gains from the unfair access.

“In these cases, no material gains have been established so far. While first log-in cannot be equated with mala fide intent and NSE examination points that these brokers did nothing with the unfair advantage, to counter this and to make a watertight case Sebi has started a new investigation,” said the third person.

The rationale behind examining the gains they may have made is this: the profits of these brokerages and average turnover increased multifold during 2010-2014, when they were supposed to have got unfair access, and went down when NSE strengthened its infrastructure.

“A transactional audit will help Sebi determine how much of it was on account of the unfair access,” said the second person cited above.

Even in OPG’s case, investigations are still on. Sanjay Gupta, head of OPG Securities, declined to comment.

Sebi has asked NSE to strengthen its systems and policies around co-location and HFT, following which NSE is redrafting its entire policy towards algorithmic trading.

“We had given NSE certain directions, some of them have been implemented. We will ensure that the matter will be taken to its logical conclusion,” Sebi chief U.K. Sinha said in his last interaction as head of the regulatory agency.