SEBI order proves no wrongdoing but puts trust on NSE at risk
MUMBAI: The jury is still out on the maintainability of Securities and Exchange Board of India’s (SEBI) order on National Stock Exchange of India (NSE), in case the exchange chooses to appeal. Though SEBI rejected the exchange’s offer to close the probe by settling for “consent”, it has exonerated NSE of fraud or unfair trade practice.
In the main case of co-location of servers, NSE has been slapped with a penalty and ordered recovery of part of the salaries paid for specific years to the past CEOs by SEBI. The allegation against NSE was that the TCP-IP based TBT (tick-by-tick) architecture was prone to manipulation, which “compromised market fairness and integrity” and that it did not consider fair and equitable access while deciding on the system architecture.
NSE said even internally it decided to do away with the sequential dissemination with a multicast method by 2015, and things have been set right even before the SEBI investigations were over. The SEBI order, experts say, has not effectively proved any wrongdoing, but proved that substantial profits were made by the brokers who got preferential treatment. While NSE is yet to announce whether it will go for an appeal or not, some brokers named in the order have moved an appeal with Securities Appellate Tribunal.
“Co-location per se is not illegal. Both the exchanges offer co-location services and it is legally available. So, I don’t understand what the issue here is. It is the high-frequency traders who need it and it's like the data speed you buy,” said a trader. But, as the saying “Caesar’s wife should be above suspicion” goes, an exchange that is expected to provide an equitable trading space cannot be seen favouring a few over others, whether inadvertently or not. The SEBI order is mild in saying “NSE has not exercised the requisite due diligence while putting place the TBT architecture.”
NSE was created in the 90s as a professionally run organisation to counter the hegemony of the broker-run BSE. Late Dr RH Patil, the founder MD of NSE, had refused to accept BSE on par with NSE even after BSE completed demutualisation, technologically and regulation-wise. “As long as the brokers are sitting in the same building, there is a problem. It continues to house brokers and management executives under the same roof,” Patil had said.
The order on Dark Fibre/ Leased Line connectivity says, “ it is established that these two Noticees have fraudulently availed of P2P connectivity with the help of an unauthorized Telecom Service Provider (Sampark) at the Colo facility of Notice no. 1 (NSE), in a manner to gain undue advantage in terms of low latency and high bandwidth in data transmission compared to other stockbrokers in securities market”. For a professionally run exchange with 90 per cent market share, this should be a shocker.