Exclusive: SEBI’s 2 Hidden Investigations Key to Unravel NSE Algo Scam
Two crucial investigations that could have significant implications on the algo scam or co-location (Colo) scam at the National Stock Exchange (NSE) that are pending conclusion and action are the key to estimating the size of the scam and profiteering from it. The first is about brokers being able to bypass the trade access point (TAP) and put in larger orders and profits and making illegal gain. The second is an expanded study by the Indian School of Business, Hyderabad (ISB, Hyderabad) to quantify the Colo scam which has been variously estimated at as much as Rs50,000 crore.
1. TAP Bypass: During the Colo investigation, Universal Stock Brokers of Delhi had written to the Securities and Exchange Board of India (SEBI) about a consultant offering a service to bypass a crucial part of NSE’s system to get a trading advantage. This is the TAP that connects broker servers in colocation with the NSE system, deployed to control the number of messages (trade orders) to the system. After an internal investigation, following the complaint, it was initially concluded that there was a problem, which was fixed.
However, when the income-tax (I-T) department raided brokers connected with the algo scam, they discovered email communications between the brokers and NSE where Exchange officials had allegedly informed brokers how they could bypass TAP.
SEBI, once again, asked NSE to investigate, and the Exchange appointed Arvind Sawant, retired chief justice of the Kerala High Court, to conduct a detailed enquiry in 2021. We understand that the report has been submitted to SEBI, and there could be some serious findings emanating from it. However, no show-cause notice has been issued, and Moneylife alone has reported on the existence of this investigation. We also mentioned it on page 265 of our book Absolute Power.
2. Quantifying the Scam: On SEBI orders, NSE appointed ISB, Hyderabad to quantify the algo scam. In the initial report, ISB, Hyderabad looked at whether OPG Securities Pvt Ltd had profited from the algo scam and concluded that it has benefited to the tune of Rs15 crore which was disgorged in 2017 along with the imposition of a penalty. This order has also been challenged by the broker, like every other order in the algo scam.
My sources say that SEBI subsequently expanded the scope of the investigation to crystallise the illegal gains and modified the terms of reference to include all the brokers, who were even remotely likely to be involved with the scam. These sources say that it requires complex data crunching which is beyond SEBI’s expertise.
Strangely enough, SEBI has maintained complete silence on the expanded scope of the investigation, even as it has tacitly worked with the NSE to permit its initial public offering (IPO). Finance minister Nirmala Sitharaman has now told a newspaper that the Union government will also investigate whether SEBI has done enough to probe the scam.
This ought to lead her to question how and why SEBI has repeatedly asked NSE to investigate itself and why it made no effort to track potential conflict of interest between the Exchange and organisations it has funded, such as ISB Hyderabad, where NSE has funded a trading lab.
Many of the auditors appointed by SEBI have a close equation with the founding team of NSE, which exercised full control over the exchange when the Colo scam became public. 
While it is perfectly possible that ISB, as an academic institution, may do an unbiased study, it was imperative for the regulator to ensure there is no cause for questions or suspicion, especially since each self-investigation by NSE has ensured a clean chit to top officials and had no hard findings on profiteering, even while conceding flaws with the system. Common sense suggests that an ongoing scam is not possible without collusion. 
In 2013-14, NSE sponsored a massive NSE-ISB Trading Laboratory for research in securities trading, investment and financial markets. This covered a lecture series that finances invitations to international speakers. Chitra Ramkrishna inaugurated the trading laboratory on 10 May 2014.
2 years ago
Justice should not only be done, but be seen to be done. This is not possible with
ISB being mandated to conduct the investigation.
Kamal Garg
2 years ago
How NSE officials only tell you "how to bypass the TAP". Interesting. But if it is happening in every case of any broker, then, the official is only helping broker to some how log into and do the trading, in case of some technical glitch and not necessarily helping someone. It happens in many case of electronic trading. Like, I have a trading terminal of one of the top broker. Whenever they upgrade their version, my Norton anti-virus program doesn't permit me to "down load and update" the same because the download has some "macro link" to their internal server which is prohibited by my Norton anti-virus program.
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