Algo trading allegation: NSE appoints Deloitte to conduct forensic audit, says report

Moneylife Digital Team 19 October 2016

Investor Interest

The National Stock Exchange (NSE) has appointed Deloitte India to conduct a forensic audit of its algo trading system and examine allegations of unfair access to some brokers in algorithmic trading, says a report.

Quoting a spokesperson of NSE, a report from Live Mint says, “Deloitte has been appointed, NSE will adhere to Securities and Exchange Board of India (SEBI) directions”.

This appointment by NSE follows an order from the market regulator to NSE Chairman Ashok Chawla. The letter sent by SEBI on 9 September 2016, asked NSE to "immediately initiate an independent examination (including forensic investigation by an external agency) of all the concerns highlighted by the SEBI expert committee in its report alleging lack of process that allowed this to happen and collusion if any and fix accountability for the aforesaid breaches covering NSE and stock brokers, vendors and outsourced entities involved in the issue.” (Read: SEBI Finally Cracks down on NSE’s Suspect Algo Trading. What does it mean? )

Apart from a forensic investigation, the most significant punitive aspect of SEBI’s directive is that all revenue accruing from its co-location facilities, including from fibre connectivity between brokers’ co-location facilities and their offices, must be paid into an escrow account. The NSE has been asked to get all concerns expressed by the committee addressed, and take necessary action, within three months.

According to the newspaper report, the forensic audit by Deloitte would cover NSE's co-location facility, algorithmic trading platform, brokers and vendors who access or are connected with NSE’s co-location facility. It will also examine allegations of collusion between NSE officials, vendors and brokers and gather evidence if any violations are found, two of the people told Live Mint.

“Based on the forensic audit NSE would examine its systems, take corrective action and submit its final report to SEBI,” the report said quoting a person familiar with the development who spoke with Live Mint on condition of anonymity.

As per the report, the forensic audit would examine if certain brokers got unfair access or were able to manipulate NSE’s existing system to get preferential access. Quoting a person familiar with the development, the report says, “As part of the forensic audit or fact-finding exercise, Deloitte would be examining the trade data, time stamps and verifying it against the broker code to gauge whether certain brokers got unfair preferential access”.

In April 2016, a Bloomberg report said that the NSE planned to challenge SEBI’s findings and insisted that there was no wrongdoing at all. The report also quoted anonymous sources connected with the NSE on its stand that the committee had, “simply repeated allegations made by an unidentified whistle-blower without doing a thorough investigation.” This time, however, the NSE appears to follow SEBI’s directive by appointing Deloitte for forensic audit.

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