What is the NSE co-location scam? | Deccan Herald

Clipped from: https://www.deccanherald.com/national/explained-what-is-the-nse-co-location-scam-1088735.html

A senior psychologist said Chitra Ramkrishna was ‘evasive’ in her responses related to the co-location scam case

CBI arrested former NSE CEO Chitra Ramkrishna on March 6. Credit: AFP File PhotoCBI arrested former NSE CEO Chitra Ramkrishna on March 6. Credit: AFP File Photo

Weeks after arresting former Group Operating Officer (GOO) Anand Subramanian, the Central Bureau of Investigation (CBI) Sunday arrested former National Stock Exchange CEO Chitra Ramkrishna in a co-location scam case. On Monday, Ramkrishna was sent to a seven-day CBI custody for interrogation related to the case. 

The CBI, which was probing the co-location scam since 2018 against a Delhi-based stockbroker, swung into action after market regulater Sebi recently released a report showing alleged abuse of power by the then top brass of the National Stock Exchange (NSE). The report stated that Ramkrishna, who was appointed the MD and CEO of the exchange on April 1, 2013, sought guidance from a spiritual guru dwelling in Himalayan ranges on personal and professional matters for 20 years. She appointed Subramanian, who did not have any exposure to capital markets, as the Chief Strategic Officer (CSO) of the exchange. Subramanian was later appointed as the group operating officer and advisor to MD. Ramkrishna was ousted from NSE in 2016 for her role in the co-location and algo trading scam and abuse of power.

What is a co-location facility?

Before we get into the allegations against Ramkrishna and others, let us first understand what co-location facilities are. Co-location facilities are dedicated spaces with infrastructure such as power supply, bandwidth etc that can be leased by a third party for high-frequency and algo trading. Traders can rent such spaces and set up their systems or programs to trade in markets. 

The NSE, the country’s largest bourse, rolled out the co-location services in August 2009. Owing to the close proximity to stock exchange servers, traders in these facilities had an advantage over others as they got faster access to the price feed (buy/sell quotes) distributed by the stock exchange. The faster access to the data, helped traders get the quote first and execute the trade faster, thereby, make huge profits. Also, since the charge for these services was high, only big brokers could afford to rent such a space.

Also read: CBI arrests former NSE CEO Chitra Ramkrishna

What is the NSE co-location scam?

It is alleged that some brokers in connivance with insiders took advantage of the fact that the NSE delivered data in the “first come, first serve” basis to make windfall profits. That is, a trader who has logged in to the NSE server with the least load first, would get information like a buy/sell order, order cancellation, order modification first compared to other traders who would connect to the exhange server later. This was known as the ‘Tick-By-Tick’ (TBT) data feed, which disseminated information sequentially in the sequence the brokers connected or logged in to the server, unlike a broadcast where everyone gets the price information at the same time.

Brokers at the co-location facility are given details of the servers and the ports to which they could connect to access the price feeds.

A whistleblower in the case alleged that OPG Securities, with help from some officials in NSE’s IT department was able to able to figure out which server had the least load so that they could get connected to the NSE server faster. The trader had allegedly mapped multiple IPs to a single server to get access to the first two or even three connections to that exchange server and crowd out other members.

A senior official used an analogy of cricket and betting to explain how the system worked. “For a common investor or a broker trading on his or her normal terminal is like watching the live telecast of the match on television or in a stadium. But imagine your eyes and ears right behind every single player in the field, getting to know their moves and strategies on a real-time basis before anyone else. And, we are not even talking about match-fixing. The sophisticated algorithms at play make it possible to access a huge amount of data on a real-time basis with the use of modern computer systems and high-tech software solutions,” the official said.

What happened after the allegations surfaced?

The Securities and Exchange Board of India (Sebi) began its probe into the matter in early 2015 after it was brought to light by a whistleblower that some brokers were allegedly getting preferential access through co-location facility, early login and ‘dark fiber’ — which can allow a trader a split-second faster access to data feed of an exchange.

Sebi had initially set up a cross-functional team to look into the matter and the regulator’s Technical Advisory Committee (TAC) subsequently recommended setting up an expert committee, which submitted its report to the regulator in March 2016. It found that NSE had violated norms of fair access and allowed some brokers to benefit.

Also, when a complaint was first made to NSE, its management dismissed it and didn’t initiate any steps to check the possibility of any collusion with the staff of the exchange. NSE’s board was asked by the panel to initiate an independent examination, including a forensic probe by an external agency. The exchange was also directed to place its co-location revenues, including from any fiber connectivity from broker’s co-location facility to their offices, in an escrow account.

What actions have been taken so far?

Over the years, Sebi has put in place stricter regulations to close the loopholes and to address concerns relating to algo trading and co-location facilities, including by making TBT feed free of cost to all trading members and asking exchanges to provide ‘managed co-location service’ through eligible vendors for ensuring low-cost services to all interested brokers.

Sebi levied a fine of Rs 3 crore on Ramkrishna, Rs 2 crore each on NSE, Subramanian and former MD and CEO Ravi Narain, and Rs 6 lakh on V R Narasimhan, who was the chief regulatory officer and compliance officer. Further, Ramkrishna and Subramanian have been restrained from associating with any market infrastructure institution or any intermediary registered with Sebi for three years, while the same for Narain is two years. Also, Sebi has directed NSE to forfeit the excess leave encashment of Rs 1.54 crore and the deferred bonus of Rs 2.83 crore, of Ramkrishna, which was retained by the exchange and deposit the same to its Investor Protection Fund Trust within six days. In addition, Sebi has barred NSE from launching any new product for six months.

Who is the mysterious ‘yogi’?

The CBI has been probing the matter since May 2018 but it hasn’t found any concrete evidence to identify the mysterious Himalayan “yogi” with whom Ramkrishna shared the classified information. Subramanian, who served as Ramkrishna’s advisor between 2013 and 2015 before being made Group Operations Officer and Advisor to the MD between 2015 and 2016, was allegedly referred to as the “yogi” in the forensic audit but Sebi in its final report had rejected the claim. Previously working as a mid-level manager in Balmer and Lawrie, Subramanian had seen his annual salary increase from Rs 15 lakh to Rs 1.68 crore, and then to Rs 4.21 crore. The CBI had also suspected Subramanian of being the mysterious “yogi”, however, the agency didn’t officially confirm it.

(With inputs from agencies)

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(With IANS/PTI inputs)

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