SEBI to challenge Securities Appellate Tribunal order in NSE co-location scam: What is the case? – The Indian Express

The Securities and Exchange Board of India (SEBI) will challenge the order of the Securities Appellate Tribunal (SAT), which set aside Rs 624 crore disgorgement order against the National Stock Exchange (NSE) by the market regulator in the co-location scam, according to a report by The Indian Express.

On Monday, the tribunal also set aside another order by the market regulator that had asked the former NSE chief executives and managing directors Ravi Narian and Chaitra Ramkrishna to disgorge a substantial portion of their salary.

Apart from this, SAT directed NSE to deposit Rs 100 crore to the Investor Protection and Education Fund (IPEF) created by the SEBI. In its order, SAT said, We must observe that when serious allegations were made against a first-level regulator, namely, NSE, Sebi should have been proactive and should have conducted the investigation seriously.

Sebi had adopted a slow approach and, in fact, was placing a protective cover over NSEs alleged misdeeds. It is only when questions were placed on the floor of the Parliament that Sebi woke up and instituted an investigation. The scope of the investigation was limited.

Co-location is a data centre facility where third parties can lease space for servers and other computer hardware. They provide infrastructure like power supply, bandwidth and cooling for setting up servers and storage of data. Customers usually rent out space by rack, cabinet, cage or room.

The NSE introduced co-location facilities in 2009 and offered traders/brokers the ability to place their servers within NSEs data centre for a fee. By being in close proximity to the stock exchange servers, traders/brokers would have faster access to the price feed and the execution of trades, due to the low latency connectivity.

In January 2015, a whistleblower wrote a complaint to SEBI, alleging that some brokers who leased space at the NSE co-location facility, were able to log into the NSE systems with better hardware specifications while engaging in algorithmic trading. This allowed them unfair access from the period 2012-2014, as the hardware specifications gave them a split-second advantage in accessing the price feed.

A minuscule difference in time can lead to huge gains for a trader. At that time NSE used to disseminate information through unicast, which is a single, direct request sent from one host to another, with only those hosts interacting over the route.

Following the complaints by the whistleblower, SEBI formed an expert committee under the guidance of its Technical Advisory Committee (TAC) to examine the allegations against NSE. It found that stock brokers at NSEs co-location facility were given preferential access, as they could log onto multiple dissemination servers through the multiple IPs assigned to them.

The committee also found that NSE followed a static mapping process for allocating members IPs to dissemination servers due to which a few brokers were able to log on to the fastest dissemination servers. At least 15 brokers were identified by SEBI for having preferential access.

Following its investigation into the issue, SEBI in 2019 directed NSE to disgorge Rs 624.89 crore and barred the exchange from accessing the market for funds for six months.

SEBI also asked the former NSE CEOs, Ramakrishna and Narain, to disgorge 25 per cent of their respective salaries drawn during a certain period. They were also prohibited from associating with a listed company or a market infrastructure institution or any other market intermediary for a period of five years.

In February 2022, the regulator once again fined Ramakrishna and Narain for corporate governance lapses in the appointment of NSEs group operating officer, Anand Subramanian, who was later arrested by the CBI. Ramakrishna was arrested in March 2022 and continues to be in jail for another matter regarding the illegal phone tapping of NSE employees.

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SEBI to challenge Securities Appellate Tribunal order in NSE co-location scam: What is the case? - The Indian Express