Algo Scam: SEBI’s Show-cause Notice to NSE 14 an Escape Route?

The Securities & Exchange Board of India’s (SEBI) show-cause notice to 14 top officials of the National Stock Exchange (NSE) hit the headlines at the end of May. But is it really a step forward in the investigation into serious charges made by an anonymous whistleblower about mismanagement and worse in the high frequency trading (HFT) segment of India’s leading Exchange?

The notice, issued by Maninder Cheema of SEBI, runs into a massive 350 pages (mainly padded up with correspondence and investigation reports). However, on reading the omnibus show-cause notice, slapped on ‘key management persons’, it appears more like a winding up procedure rather than punitive action.

SEBI’s notice copiously cites provisions from various regulations to charge the 14 officials with failure to ensure ‘fairness’, ‘transparency’ and ‘equitable’ dealing, without attempting to pinpoint responsibility even after two detailed investigations—one by SEBI’s technical advisory committee (TAC) and a forensic audit by Deloitte Touche Tohmatsu India LLP (Deloitte), both of which have corroborated the charges made by the anonymous whistleblower.
Moneylife was the first to bring the whistleblower’s letter to public attention and was sued by the NSE for its effort.

It is common knowledge that three or four persons in the NSE’s top management called the shots (they certainly took the credit for every success, as would be evident from an analysis of salaries and payments from the NSE’s Employee Welfare Trust); yet, all 14 seem to have been jointly and severally held responsible for management and policy decisions as well as operational issues.

The notice is largely a narration of the findings of SEBI’s TAC and the Deloitte report, much of which is already in the public domain. The main charges are that NSE’s tick-by-tick (TBT) system architecture was prone to easy manipulation and allowed brokers to connect first to get a price advantage; brokers who connect first through multiple IPs (internet protocol) could ‘crowd out’ others; and, certain brokers were given access to servers (including back-up servers) which had less of a load, giving them a big price advantage. Further, NSE had no standard operating procedures (SOP) for allocation of members to co-located (colo) servers, or documented policies and protocols with regard to various aspects of the TBT system, or retention of electronic records for key officers. There were oral instructions from ‘seniors’ about allocation and switching of colo servers. Requests by some brokers were entertained with alacrity while others were curtly denied. The upshot was that the favoured brokers reaped huge profits. Both, TAC and Delloitte, have documented the fact that NSE’s officials often misled them or did not cooperate in the investigation.

The enormity of these systemic issues and favouritism is evident when you consider the fact that the algorithm-based HFT whipped up average trading volumes of nearly Rs3 lakh crore a day in 2015-16 and large institutional brokers invested significant sums of money in technology and colo servers precisely to get that nano second of advantage in accessing prices. So let’s look at what one would have expected to find in the show-cause notice.

1) The SEBI notice says that that the NSE management dismissed charges made by the whistleblower (sent by SEBI to NSE on 9 February 2015 and 9 July 2015) as “completely baseless, devoid of facts and imaginary.” In the light of subsequent findings, shouldn’t senior management be specifically asked to explain the basis of the denials?


2) SEBI notes that the NSE allowed a non-ISP like Sampark Infotainment to lay fibre in its premises for various members in violation of its own policy. The dark fibre connected NSE and the Bombay Stock Exchange (BSE) and allowed one firm, Alpha-Grep, to benefit substantially before connectivity was opened up for others. Surely, this ought to have been an easy issue on which to pin specific responsibility for the decision? Especially when SEBI’s TAC report details how Sampark Infotainment and Reliance Sampark officials had visited the NSE nearly 120 times to survey the site, lay the ‘dark fibre’ link and do the testing.


3) SEBI’s notice makes no mention of the sudden increase in turnover of Alpha-Grep (a subsidiary of Way2Wealth Capital Services, which has a powerful political connection), although it is confirmed by the TAC report. The overall trading turnover of Ways2wealth increased from 3.31% in January 2014 to over 9% in the second half of 2015, says the TAC. And, its share of algo-trading on the Exchange increased from 12.98% to over 25% in the same period. Elsewhere, it notes that Ways2Wealth’s turnover increased from 7.5% in April 2015 to 12% by August 2015, and dropped to around 10.6% after December 2015, “presumably as a result of other brokers being allowed to lay their colo line.” Hence, it says, “we can causally attribute” the increase in market share to laying the ‘dark fibre’. It is interesting that SEBI’s notice does not mention any of this and stops at noting that the NSE violated its own policies by allowing Sampark Infotainment to lay a dark fibre link to connect with the BSE. Surely, this was not a collective decision by 14 NSE employees?


4) The notice says that NSE “employees, including key management persons, have not cooperated with SEBI, Expert Committee as well as the forensic auditor” and that they “failed to provide requisite information sought by SEBI.” Again, there is no charge against specific individuals, although some of them had quit before the investigation began.


5) The forensic audit has raised serious questions about three persons, namely, Jagdish Joshi (especially), Avdhut Gharat and Mahesh Soparkar, in helping OPG Securities, which was allowed to log on to less crowded servers and allotted multiple log-in IPs. SEBI’s notice documents these observations and the fact that OPG Securities wrote to these three officials “thanking them for their support in terms of prompt response and useful advice in making their operations more efficient.” OPG Securities has moved the Delhi High Court, challenging the NSE’s claim that it had logged on to the secondary server, despite several warnings. It will be interesting to see if NSE is able to produce any of the warning letters.


6) The forensic audit specifically noted that Jagdish Joshi was very prompt in responding to OPG Securities and not to others like Barclays Capital, Adroit Financial and Pace Stockbroking. The last mentioned had its request to switch to a better server curtly turned down on the grounds that “we don’t change parameters on member request.” There is extensive documentation of how brokers, like OPG, used as many as 22 IPs to log into colo servers first and crowd out others from getting prices before it in the TBT system.

All this highlights rampant favouritism. SEBI quotes the forensic report which says, “It may be relevant to note that MTBT (multicast tick by tick) was introduced in April 2014 and Jagdish Joshi left the NSE in May 2014, after which we have seen a decline in the number of first connects.” And, yet, the notice has no specific charge against any individual.

Media reports, as well as our own sources, say that the NSE is seeking legal advice and is most likely to seek a closure by filing consent terms. This is apparently to allow the Exchange to move ahead, free the funds that SEBI has ordered to be impounded in an escrow account, and go ahead with its public issue. Allowing this without a complete clean-up would be dangerous for the markets at a time when the derivatives turnover has soared to over Rs8 lakh crore on 1 June 2017. It will only set up the Exchange for a similar misuse in future and could make the market vulnerable to a possible flash crash.

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    ashok s

    2 years ago

    On the dot.Does Alpha-Grep owned by Tamil Nadu Politician

    Sethu Raman

    3 years ago

    Now Nse and bse totally removed the downside market.the way now it is behaving.


    3 years ago

    NSE has always been a entity which has acted in a autocratic manner with Brokers and Investors.It has build it's finances by imposing heavy penalties and fees on brokers and investors.All this due to monopolistic position it has developed in the Indian Securities Market due to government patronage.All the persons guilty in the high frequency trading scam should be heavily punished with severe financial fines and jail terms.This alone can deter others from indulging in similar scams.

    Bha vesh

    3 years ago

    Typical of SEBI. It botches up in most inquiries. NSE as an exchange should act on its own, come clean. Promoter shareholders should start asking question the board. Usually vocal government should also build pressure on the exchange for transperancy after all it is an important branch of financial economy



    In Reply to Bha vesh 3 years ago

    [email protected] 9950321327 fraud in sebi itself

    jaideep shirali

    3 years ago

    Firstly, NSE should name the concerned officials, it is very obvious that the rot was at the top itself. The fact that even the VC's position itself was not sanctioned by the Board is an indicator. It is shocking that whenever government officials or officials in bodies set up by the government are concerned, in this case financial institutions, we always try to sweep these problems under the carpet. These officials should neither be provided legal support by NSE or access to the records. As a citizen, I feel that SEBI should ensure that NSE's IPO is postponed till such time action is taken and cases or civil or criminal neglect, as well as abuse of authority with an intention to cause business losses to many participants, is filed against these officials.


    3 years ago

    Independent audits establish that the National Stock Exchange was managed like any Public Sector Bank or other Unit or Government itself:

    Rajesh Ramakrishnan

    3 years ago

    Absolutely spot on "Moneylife" in your relentless fight against the so called capital market movers and shakers. The moot question is whether is SEBI really asleep or pretending to be one. These NSE cronies are responding through legal and other means just to delay the proceeding and to wane public interest so that they can get listed at hefty valuations in the present bull run.

    NSE: The Real Clean-up that We Need
    Under the late Dr RH Patil’s leadership, the National Stock Exchange (NSE) bucked all predictions of failure and became India’s showpiece Exchange with a near monopoly over trading and a reputation for meticulous fair play. But transparency was always an issue with the NSE. My first experience with the lack of it was when its top brass, otherwise extremely friendly and appreciative of the unstinted support that I gave the Exchange when it was the David to the Bombay Stock Exchange’s (BSE) Goliath, refused to part with its annual report. It required some arm-twisting before I got the annual report from a public institution. What was it hiding? Nothing. It had not sunk to its current levels. It did not want brokers to know how profitable it was, for fear that they would lobby to reduce is high transaction charges. 
    Over the past two decades, the Exchange has remained highly successful and extraordinarily profitable, partly because the broker-led BSE failed to anticipate the winds of change; but mainly because successive chairmen at the Securities and Exchange Board of India (SEBI) allowed the NSE’s founding team to dictate market policy and destroy competition through fair means or foul. 
    Today, a variation of Lord Acton’s quote, “Power tends to corrupt, and absolute power corrupts absolutely” applies aptly to it. Although the NSE was conceived as a ‘professional’ Exchange, for 25 years the founding team has passed the baton from one to another without allowing any outsider into the top management. Cronies were brought in as consultants and, since it was structured as a private company, there was almost no disclosure or oversight. As the NSE grew in size to a near-monopoly and turned obscenely profitable, its clout and power increased exponentially. The Exchange was bigger than the market regulator, SEBI, and the past two SEBI chairmen did nothing to rein in the Exchange. Its top management selected its board; its public interest directors and its non-executive chairmen were all mere puppets. SEBI rubber-stamped all decisions.
    Naturally, the management wanted the NSE to remain an unlisted private company, enjoying exceptional clout and no accountability. Its ability to get SEBI to set up multiple committees to discuss listing rules for stock exchanges, only to reject all suggestions, was well known in capital market circles. This only enhanced fear and awe of the Exchange. We gather that UK Sinha even gave a severe dressing-down to the BSE for ‘instigating’ its investors to press for listing.
    By now, NSE was Goliath. It took a slingshot from tiny Moneylife to trigger a chain of events. In June 2015, we published a whistle-blower’s letter about unfair trading practices in NSE’s high frequency trading (HFT) and co-location. The NSE dragged us to the Bombay High Court’s with a Rs100 crore suit. The Court said that the NSE couldn’t decline to give a clarification despite repeated requests, and then claim defamation; it even slapped a fine of Rs50 lakh on the Exchange (NSE’s appeal is pending). A year later, NSE’s managing director and CEO, Chitra Ramakrishna, found the going too hot and quit.
    Investigation and subtle pressure by government agencies and RTI (Right to Information Act) filings by us, finally, escalated into a serious investigation by SEBI’s technical advisory committee (TAC). More whistle-blowing by insiders exposed the rot in senior appointments and its ineffectual board. All this culminated in a show-cause notice being issued, at the end of May, to 14 top officials of the bourse, including the two remaining members of the core founding team—Ravi Narain (non-executive vice-chairman) and Chitra Ramakrishna. 
    Where does the Exchange go from here? Clearly, it is in India’s interest to ensure that the NSE remains a strong and a globally reputed bourse. It is equally in the national interest that the NSE is subject to discipline, is prevented from dictating policy, and its senior appointments as well as operations are transparent. In fact, NSE’s institutional investors, who were threatening litigation to press for listing, should be pressing for this, since there is no evidence, so far, of a serious overhaul of management to weed out the cronies. 
    What do we want in terms of a clean-up? Here are a few issues that need to be addressed. 
    1) For starters, SEBI chairman Ajay Tyagi should investigate the revelations in an email by Jamie Jones, an ex-employee turned whistle-blower. Asking for a 360-degree probe, he says the probe should begin with how the NSE was allowed to start HFT and co-location without SEBI framing rules, putting out a discussion paper and issuing regulations. The NSE has claimed in court papers that HFT was permitted in 2008 and the bourse started it in 2010. 
    2) SEBI’s show-cause notice reminds the top brass that NSE is a ‘first level regulator’ and “duty bound to promote and practice fairness and transparency in its operations.” In that case, the NSE must be asked to submit to the Right to Information (RTI) Act, as ordered by the central information commission (CIC) and the Delhi High Court. It should withdraw the appeal pending before the division bench. SEBI must also frame rules that ensure more transparency, as part of the listing conditions. 
    3) SEBI must ensure full transparency and disclosure with regard to several aspects of NSE’s operations. This includes payouts from the NSE Employee Welfare Trust over the past 10 years and all royalty payments for construction of various indices. Payments to various consultants and their multiple appointments with the NSE and its many subsidiaries. There is a lot of dirt in these places.
    4) SEBI must put in place rules to eliminate conflict of interest in the appointment of consultants by mandating the same disclosures that independent directors of listed companies are required to make about their other directorships and relationships. Mr Tyagi has a whistle-blower’s letter providing specific information on several shadowy deals that must be unravelled, cancelled and cleaned up before the NSE goes public. 
    5) The sacking of NSE’s human resources (HR) chief (officially, he quit for ‘personal reasons’) needs inquiry. Informed sources say that he was held responsible for failing to follow procedure in the appointment of Anand Subramanian, who resigned in October 2016 after anonymous letters exposed details about his appointment, pay and perquisites. The buck for this controversial, high-profile appointment, without an interview process or relevant experience cannot be passed on to a mere HR chief. Mr Tyagi needs to investigate the facts provided by Jamie Jones. He says one person who should have objected to this highly irregular appointment was vice-chairman Ravi Narain. He was on the NSE board when Mr Subramanian was given huge powers, elevated to group operating officer, nominated to the boards of NSE IT, DotEx and ILSS. He surely knew about NSE’s failure to list him as a key management person to SEBI. 
    6) The NSE has apparently appointed a two-member committee to look into the issue of collusion between its officials and brokers, detailed in the forensic audit by Deloitte and SEBI’s TAC. Strangely, this has been omitted from its recent show-cause notice. Will this action make scapegoats of a few employees? Ideally, SEBI should have appointed an independent person to do the job. Asking a felon to investigate himself is rather strange.
    7) SEBI, reportedly, plans action against a few brokerage firms to get them to disgorge profits earned. There is no indication from the two investigation reports (TAC report and Deloitte) of any attempt to quantify the unfair gains. In any case, this will, most likely, end up in messy litigation and throw up more dirt about NSE’s dealings, especially with OPG Securities. 
    8) Finally, SEBI must put in place a mechanism to ensure that no Exchange is ever allowed to become so powerful that it dominates the regulator and the government or is able to crush all competition. This is extremely dangerous for the capital market. 
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    B. Yerram Raju

    3 years ago

    SEBI investigate on the lines suggested by the author. Second, investigations shall be time bound and fast. The Inquiry Report shall be followed up by tangible actions that would promote investor confidence in this highly important institution in the stock market. The whole process should be completed in no more than 3 months.

    Mahadevan Kv

    3 years ago

    If one goes into the historical facts of how SEBI and NSE were formed and grew into what they are today the monopolistic tendencies will be very evident. It is the same team that dominated the NSE that created and formed the SEBI albeit under the aegis of IDBI.
    But then the urge to innovate also has the side effects of exploiting the loopholes to the advantage of the powers that be .
    It is symptomatic of the political scenario of our law makers being the law breakers with impunity.


    3 years ago

    SEBI is created to function as an independent regulator. It should go into the wrong doing and take necessary action to ensure that NSE becomes a listed public ltd. Co. . It is high time to restore the reputation of NSE and bring transparency in its operations.

    Simple Indian

    3 years ago

    It is strange that companies in which investors transact through Stock Exchanges like NSE / BSE are listed and answerable to the public, but these Exchanges themselves aren't listed and remain private entities, and hence outside the purview of public scrutiny. Perhaps this is a loophole in our laws which enable an unlisted Stock Exchange to operate like NSE has been doing. SEBI, like RBI, is a statutory body vested with enough powers to reign in delinquent entities they are supposed to oversee, NSE in this case. Yet, like RBI ignores excesses by PSU Banks regularly, SEBI seems unconcerned about clean transparent dealings in the stock market.

    anonymous trader

    3 years ago

    When CTT was introduced it was introduced on Non Agri Commodities, where as Agri Commodities there was not CTT. NSE has a stake in NCDEX who have the bulk share in Agri commodities. Clearly it smells that it was done to cripple non agri commodities which was competition to NSE and that is exactly what happened. With options not allowed in commodities all benefits were reaped by NSE as volumes moved to NSE . After reading this article things are becoming more clear . Commodities markets specially non agri was not allowed to grow as was a competition. Very good points made in the article. With new SEBI Chairman in place really wish and hope good steps would continue to be taken finally as he is doing.

    J Thomas

    3 years ago

    NSE should be listed.


    3 years ago

    Wow SEBI should consider a name change to National Crony exchange , if they do not want to do a full clean up.... that will atleast warn investors / brokers .

    Ravi Narain resigns from NSE Board
    Ravi Narain, Vice Chairman and former Managing Director & chief executive (CEO) of the National Stock Exchanges has resigned from the Exchange Board. Mr Narain, one of the founding members of NSE, had sent his resignation to NSE Chairman Ashok Chawla last night, say sources. This follows a show cause notice issued by market regulator Securities and Exchange Board of India (SEBI) to Mr Narain and 13 others, in the algorithm (algo) or high frequency trading (HFT) case. 
    Others who were issued notice from SEBI includes NSE's former MD & CEO Chitra Ramakrishna, Ravi Varanasi, present chief of business development, Suprabhat Lala, present chief of regulation, Ravi Apte and Umesh Jain, both former chief technology officer and Subramanian Anand, former chief operating officer at the Exchange. 
    Media reports say SEBI had sent notices to some officials in the technology and business divisions of NSE to get their reactions on the co-location (Colo) misuse allegations. "Till March 2013, Ravi Narain, one of the founder-members, was the CEO of the exchange. Narain, who stepped down a year before his term ended, continued to be a director on the NSE board. He was succeeded by Chitra Ramkrishna during whose term NSE switched over to a technology that was far less prone to manipulation. She resigned abruptly as CEO in December 2016, almost 15 months before the end of her term," says a report from the Economic Times.
    An investigation report by SEBI had come to the conclusion that NSE had given preferential access to some stock brokers to its servers, making it possible for a stock broker to log into multiple servers through multiple internet protocols assigned to him, during 10 December 2012 to 30 May 2014, the newspaper says.
    Mr Narain was at the helm during this period. He was chief of NSE from 2001 till 1 April 2013. 
    You may also want to read…
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    Ashok Visvanathan

    3 years ago

    Algo trading should not have an advanatge over humans. They should introduce a random delay so that humans and machine have the same efficiency.

    Vaibhav Dhoka

    3 years ago

    In India regulator or people in position are far less impartial i.e they become manipulator and behave as rogues​ & become crooks.In this always scapegoat is small investors.In present regime at centre investigation are taken to logical end by taking punitive action.Cudos to central government.

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