SEBI was deeply perturbed about regulatory flaws exposed by Whistleblower's letter, reveals RTI
After receiving a letter from a Whistleblower in January, SEBI felt it was time to urgently have a "basic regulatory framework" for co-location services
Market regulator Securities and Exchange Board of India (SEBI), after receiving a letter dated 14 January 2015 from a Whistleblower alleging dubious practices followed for co-location services by a stock exchange, felt that there was a need to 'urgently have a basic regulatory framework for co-location services', reveals a reply received under the Right to Information (RTI) Act.
According to the reply received from the market regulator, a note dated 26 February 2015 from its Market Regulation Department- Division of Policy shows that there were no specific regulatory requirements prescribed by SEBI on co-location facility. It says, "...at present, there are no specific regulatory requirements prescribed by SEBI that stock exchanges are required to adhered to while providing co-location facility to the stock brokers."
"In view of the allegations made in the letter of xxx (name withheld by SEBI), it is felt that there is an urgent need to have a framework for regulating the activity of co-location. While the proposal related to two-queue architecture may be further debated, the requirement to ensure 'Fair and equitable access to the co-location facility' and 'integrity and security of the data and trading systems' may be issued," the note says.
It may be recalled that Sucheta Dalal, Managing Editor of Moneylife also received a copy of the letter from the Whistleblower at the same time. After waiting for almost four months and doing thorough research, she sent the letter to SEBI seeking information on action taken by the market regulator, if any. There was no response from SEBI.
According to the reply received under the RTI, in a note on 3 March 2013, SEBI has stated that Indian exchanges, either on their own or through third parties were offering the facility of colocation. Here is what SEBI stated in the note prepared by its Market Regulation Department- Division of Policy…
i. “NSE: Vide circular dated August 21, 2009, NSE has allowed informed that it will provide co-location facility to its members for their DMA and ALGO IT infrastructure at its premises.
ii. BSE: Co-location facility is being offered by the stock exchange through a third party IT Service Provider (Netmagic Solutions Pvt. Ltd.)
iii. MCX-SX: Vide circulars dated December 23, 2011 and December 07, 2012, MCX-SX has allowed its member to use co-location/ proximity hosting.”
As per MarketBeat blog on Wall Street Journal
, while a "multitude of data is being transferred from exchange to exchange and then onto a trader’s computer, high-frequency and other traders can access prices a split second faster through direct feeds. This practice is known as collocation, and it’s employed by nearly every exchange in the US. For a fee, trading firms are allowed to place their trading computers in the same data centres that house an exchange’s computer servers. With sophisticated models built into these trading computers and little oversight on the exchange itself, the computers are almost guaranteed to be the first on any order should they choose to act on."
Here is the reply received from SEBI under the RTI Act...