NSE Algo Scam: Sebi faults top NSE officials, E&Y fails to confirm it
17 August 2018
The Securities and exchange Board of India (SebI) has alleged that former top-ranking executives of the National Stock Exchange of India Ltd, Ravi Narain, Chitra Ramkrishna and Subramanian Anand, “facilitated fraud and manipulation” by failing to take preventive and curative measures against brokerages gaining preferential access to the bourse’s servers.
The market regulator, in a two-part final show-cause notice, named three brokerages and also alleged “active connivance of NSE officials”.
The show-cause notices confirm allegations that some broking firms gained preferential access to the NSE’s high-speed algorithmic trading platform through its co-location service.
The three brokerages named are OPG Securities Ltd, Way2Wealth Brokers Pvt. Ltd and GKN Securities Ltd. They allegedly had a latency advantage (lower time for data to travel) over other NSE members which resulted in monetary gains for them.
The marker regulator, however, took exception to the report by consulting firm Ernst & Young (E&Y), which refused to confirm this despite clear evidence of wrongdoing made out in its forensic audit.
E&Y, “based on its findings, has not arrived at clear inferences / conclusions, despite the evidences noted during its audit. The committee wondered why a forensic firm like E&Y is incapable of drawing conclusions from obvious findings and does it compromise as a position of independent forensic auditor in future (sic).”
Sebi’s technical advisory committee (TAC) came down heavily on the attitude of Ernst & Young during a meeting held on 14 June 2018 at New Delhi to discuss the revised E&Y report on the infamous high-frequency trading (HFT) scam, or Algo scam, of the National Stock Exchange (NSE).
Present at the meeting were Madhabi Puri Buch, whole-time member of Sebi; Manoj Kumar, chief general manager, and three other officers of Sebi. TAC is headed by Ashok Jhunjhunwala.
E&Y was appointed to examine in detail the allegations of a whistleblower that, in 2014, some brokers were consistently allowed to log into the co-location servers of the NSE ahead of others, following a breakdown in systems and due processes at India’s largest stock exchange.
The E&Y report followed two other investigations: by an expert committee appointed by TAC in late-2015 and one by Deloitte, appointed by the NSE in late-2016.
According to the minutes of the meeting, the TAC chairman reviewed the revised reports submitted by E&Y and observed that E&Y, during its forensic audit, has found “additional evidence in terms of data, email communications, etc, which is in line with the findings of the report of Expert Committee and report of Deloitte Touche Tohmatsu,” of December 2016.
However, despite this is clear confirmation of wrongdoing, E&Y, “based on its findings has not arrived at clear inferences/ conclusions, despite the evidences noted during its audit.
According to TAC, the underlying principle regarding trading through co-location is the faster access to data that gives a potential advantage to the trading member(s). Therefore, “opportunities to have undue and unfair access by some of the trading members is a gross violation of the basic principle of fair and equitable access irrespective of how much profit a firm was able to make. SEBI can take suitable and appropriate action to ensure that entities including the exchange are penalised and such events do not recur in future,” according to the minutes of the meeting.
The whistleblower’s allegations about unfair access granted to some brokers were published first in Moneylife in June 2015, in response to which the NSE filed a defamation case against us for Rs100 crore at the Bombay High Court. The single-judge bench concluded that the NSE was not defamed and fined NSE Rs50 lakh for the frivolous and intimidating suit.