The Indian financial watchdog, Securities and Exchange Board of India (SEBI) has imposed a 1,100 crore rupee fine on the biggest stock exchange in the country – the National Stock Exchange of India (NSE) and banned the NSE from introducing any new derivatives during the next 6 months.
SEBI found out that the NSE was involved in a broker scam where the exchange had deliberately favoured certain brokers and enabled them to make a lot of money by taking advantage of illegal trading software which allowed them to have their networks and servers in the same location where the NSE had its servers and networks.
This type of scam is what the market calls a co-location scam. An exchange can sometimes allow specific brokers close access to their servers and networks in exchange for a higher fee. This gives these brokers a specific advantage over the rest of the competition as when you deal with traders on a daily basis, every micro second counts in determining the amount of money you can make or lose.
The scam came to the attention of SEBI after a couple of whistleblowers highlighted the fact that the NSE was providing preferential treatment to certain brokers. These allegations were made back in 2014-2015 when the NSE was relying on a server that used the tick-by-tick protocol for its transactions. The biggest difference with this protocol is that it submits data based on the order of transactions it receives rather than normal server protocol which is to send data to all traders at once.
Brokers Who Benefitted
The Sebi investigation showed that two former MD’s of the NSE had permitted three specific brokers to benefit from this unfair advantage. The brokers who benefitted were named as Way2Wealth Securities, GKN Securities and OPG Securities.
Sebi also decided to ban the two former MD’s of the NSE for a period of 5 years. Chitra Ramkrishna and Ravi Narain were also instructed by the financial watchdog to return a portion of their salaries that they received during the years when they offered preferential treatment to these three brokers.
The NSE has also been instructed to give back the illegal gains they made during this 5 year period along with interest, which should amount to 1,100 crores. The three brokers have also been banned for a 5 year period.
