NSE Co-Location Case- Explained

February 21, 2022

The NSE co-location scam involves market manipulation at India’s largest stock exchange, the National Stock Exchange of India. Certain people got market information ahead of the rest of the market, allowing them to earn huge profits, thus violating the NSE’s demutualization exchange governance and transparency-based system.

Overview:

Insiders’ alleged collaboration in rigging NSE’s Algo-trading and using co-location servers resulted in large earnings for a group of brokers.
In January 2015 the Securities and Exchange Board of India (SEBI), received the first anonymous complaint through a whistle-blower revealing a multibillion-dollar market fraud.
According to the whistle-blower, members were allegedly able to earn profit from advance knowledge received from some exchange authorities.
Over five years, the total default amount through NSE’s high-frequency trading (HFT) is anticipated to be Rs 500 billion.
The Securities and Exchange Board of India (SEBI), Central Bureau of Investigation (CBI), and the Income-tax Department are investigating the NSE co-location case. They are looking into the involvement of NSE and SEBI officials, as well as NSE’s current and former executives and brokerages.
In response to a Public Interest Litigation (PIL) filed by the Chennai Financial Markets and Accountability Authority, the Madras High Court has issued a notice to SEBI, MCA, and ED.

What is Co-location?

Co-location facilities are certain dedicated spaces in the NSE building and are extremely close to the dedicated exchange servers where algo and high-frequency traders can deploy their programs or systems.

Because the co-location facilities are so close to the stock exchange computers, traders who use them have an advantage over other traders because of the reduced time taken for order execution. However, institutional investors and brokers mostly employ co-location for their proprietary traders. Retail investors have little role in this area.

NSE’s co-location facility was the location of a nearly ten-year-old scam. It was claimed that between 2012 and 2014, one of the trading members, OPG Securities, was given unfair access to the secondary server, allowing them to log in and acquire the data before the rest of the co-location facility. This preferred access allowed this member’s algo trades to be executed before those of others.

How did the scam happen?

The broker was helped by certain NSE workers, according to SEBI’s examination through a Technical Advisory Committee otherwise it would have been difficult for this stockbroker to continuously connect to the NSE’s secondary server.

The unearthing of the scam

This scam was exposed due to a whistle-blower report to SEBI which revealed the full scheme of the persons manipulating the system. When Moneylife uncovered the scam, the NSE management filed a defamation suit against Moneylife for Rs. 100 crores. The case was taken to the Bombay High Court, which ruled against NSE and rejected its lawsuit. NSE was also ordered to pay a fine of Rs. 50 lakhs for its rude reply to the media.

The investigation conducted by SEBI

In the year 2016, NSE was asked by SEBI to conduct an assessment of its systems and deposit any earnings from its co-location facilities in an escrow account. The job of performing a forensic audit of NSE’s systems was given to Deloitte. SEBI issued an order in 2019 ordering NSE to pay Rs 625 crores plus 12% interest, as well as prohibiting NSE from raising funds from the stock market for six months.

Chitra Ramakrishna and Ravi Narain, who were in charge of NSE at the time, were ordered to pay back 25% of their income, and penal orders were issued against others who were found to be manipulating the system.

NSE has been fined one crore rupees, and Ravi Narain and Chitra Ramakrishna have each been fined 25 lakh rupees.

Silver Stream Equities and Adroit Financial Services both received a Rs 6 lakh penalty from SEBI for violating NSE co-location facility rules. During the years 2012-2014, these stockbrokers repeatedly logged in to the secondary system for no reason.

What is Algo-trading?

Algorithmic trading or Algo-trading is an order executing method using pre-programmed automated trading instructions that account for price, time, and volume.

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