Is SEBI Burying the NSE Algo Scam; Failing To Go Deep?
Just over a week ago, when the National Stock Exchange (NSE) celebrated 25 years of its existence, Vikram Limaye, the current managing director (MD) and CEO, was confident that the bourse would soon put the algo trading controversy behind it by filing a revised consent application with the Securities and Exchange Board of India (SEBI). 
 
It may be just a happy coincidence, but a flurry of actions happened just before Mr Limaye’s statement. SEBI sent out a fresh set of show-cause notices (SCNs) that appear to have concluded the 2.5-year investigation into what is popularly known as the algo trading scam first exposed by Moneylife. Technically, the consent application can be filed only after an investigation is complete and sources say that Mr Limaye probably had an informal assurance that the Exchange could go ahead and file a consent application. 
 
Soon after, on 13 August 2018, SEBI put out for public comment the report of a high-level committee to review its enforcement and settlement process, which may give it more leeway to tweak the consent rules. 
 
The show-cause notice itself is a massive set of 1,500 pages of documents that seem unable to come up with very specific evidence of wrongdoing, even after piecing together a wealth of evidence, three detailed investigation reports, as well as a mass of emails and testimony on oath from all the major players. The three investigations were done by SEBI’s technical advisory committee (TAC), Deloitte Touche Tohmatsu and Ernst & Young (which did a forensic audit).
 
What should be a matter of real concern is that this only establishes a complete absence of investigating skills. SEBI does not have a single officer with a police background who could lead and guide investigation. There was a time when the executive director in charge of compliance and investigation used to be a former police officer; but not anymore. Consequently, the mountain of evidence clearly identifies wrongdoing, but cannot pin responsibility. 
 
Instead, the show-cause notice, while clearly stating that brokers, such as OPG Securities, got preferential access and could consistently log in earlier, does not come up with hard evidence on who was responsible for things going wrong. The reason for this is obvious. The NSE has taken on the responsibility of providing legal help for all the employees who are targets of SCN and the entire push is towards a consent order that will allow everybody to get away with, at best, a rap on the knuckles. 
 
Consider this. SEBI says OPG Securities gained preferential access day after day on select servers, which indicates “complete laxity and dereliction of duty on the part of” Ravi Narain (former MD and vice-chairman) Chitra Ramakrishna (who quit as MD in December 2016) and Subramanian Anand (group operating officer who quit in October 2016). Starting with the top three, it goes on to sprinkle vague allegations on four levels of officials with words such as failure to take “preventive as well as curative measures proactively,” or failure to “perform their role in establishing adequate systems,” leading to some brokers gaining fair and equitable access and so on. 
 
The words ‘consistent unfair access’ and ‘preferential access’ to OPG Securities prefacing so many paragraphs of the show-cause notice only make it embarrassing. When SEBI is clear that there was “consistent unfair access to OPG,” why isn’t it established with evidence or masses of emails attached to the notice?
 
Preferential Access
The documents show that things moved super fast for OPG Securities. It got quick appointments with NSE’s top brass and requests for an additional rack, as the MD asked for—‘ASAP (as soon as possible) action’. The same is true of Ways2Wealth and GKN Securities who were allowed to set up a dark fibre connectivity between the NSE and the BSE (Bombay Stock Exchange) by Sampark Infotainment which did not even have an ISP (Internet service-provider) licence. 
 
In contrast, an angry email from KK Daga of Millennium Securities to Ravi Varanasi (chief of business development) titled “My Grievance” documents the run-around he got when he applied for a similar dark fibre link between the NSE and the BSE, confirming the allegations by the whistleblower.
 
Mr Daga insisted that the NSE must bring ‘all members on par’ and was told that they were. He pointedly asked: “When you say at par, does this mean no other member is on Sampark circuit as on date?” knowing full well that Ways2Wealth and GKN Securities were, indeed, preferred.
 
Email data also shows a flurry of activity to get Sampark’s network to be speedily acquired by Reliance Communications after the discovery that it did not have an ISP licence and too many members were demanding parity with the preferred two. 
 
On questioning by SEBI, NSE’s officials have claimed on oath that, although Airtel, TCL, Tata Tele and MTNL were potential service-providers, none of them responded. SEBI’s officials have not converted all this information into specific charges by better compilation and investigation.
 
Evasive Responses
This is the second set of show-cause notices (although not as weak as the first set last year) which dutifully note a series of bland and evasive answers by Ravi Narain and Chitra Ramakrishna who were part of NSE’s top management for over 22 years since it was founded. 
 
It is common knowledge that NSE’s operations were under the iron-control of this duo in every aspect; and, yet, they themselves claim to be hands off. They claim to have little knowledge about Sampark Infotainment and OPG Securities, are vague about Omnesys, a broker front-end software and algo company of NSE that dominated NSE’s algo trading clearances in the initial days. 
 
Not only did the NSE have a stake in Omnesys, but Chitra Ramakrishna was on its board of directors claiming it was a key investment. After aggressively promoting Omnesys, the NSE abruptly exited its stake. Whistleblowers have made specific allegations about this; but SEBI’s investigation is limited to a series of bland questions.
 
Complex Relationships
Now consider Ravi Narain’s testimony. He does not recall any meeting with OPG, is ‘not aware’ of any incentives or recommendations to use Omnesys as an algo-trading software vendor. This should be a clear yes or no answer. Asked if he was “aware of the conflict of Suprabhat Lala being related to Sunita Thomas (running an algo software developer company—Infotech Financials),” his reply is that he “was not aware of any such relationship.”
 
When Chitra Ramakrishna was asked the same question, she says, “I do not recall any disclosure being flagged to me.” Wouldn’t this amount to shocking negligence on the part of the NSE, if Mr Lala was directly responsible for disclosure, since he headed vigilance and compliance at various times?
 
For the record, Sunita Thomas is the sister of Susan Thomas who is married to Ajay Shah. Suprabhat Lala has, at various times, headed NSE’s vigilance, compliance, trading and customer relations. Is it possible that Ravi Narain did not know about the relationship, especially when Sunita Thomas was the sister of Susan Thomas?
 
What makes this significant is that Ajay and Susan were the only academics with deep access into the NSE. They received trading data from the NSE, first, in their personal capacity and, later, as academics associated with IGIDR (Indira Gandhi Institute of Development Research). IGIDR also obtained substantial funding from the NSE. Ajay Shah’s testimony reveals that he and Susan Thomas had full discretion on the use of funds (although they did not receive direct payment). Ajay Shah further admits, in his sworn testimony, that IGIDR often sub-contracted work to Infotech Financials, recommended its services and also shared data with it. 
 
In fact, they were all part of the charmed friends circle of NSE’s top brass. SEBI’s notice makes no attempt to join the dots and come to specific conclusions—or probe deeper. 
 
Chitra Ramakrishna’s other answers are similarly implausible.  She was singularly responsible for the appointment of Anand Subramanian as ‘strategic advisor to the managing director and board’ despite his having no background in technology, capital markets or regulation. He was also promoted to the position of group operating officer with similar perks and benefits as those of the MD. In fact, NSE’s HR (human relations) chief was reportedly asked to leave due to this irregular appointment. SEBI’s has asked detailed questions; we need to see if it will come to hard conclusions.
 
Ms Ramakrishna also claims no knowledge of technology details, or even the sharing of responsibilities among three technology heads, although these functions were at the very core of NSE’s operations and existence. Questions about the failure to implement load-balancers and / or preferential access are brushed off as ‘operational’ or ‘technical’ issues about which she had no specific knowledge. 
 
At a time when the Companies Act and SEBI’s corporate governance rules require repeated and detailed disclosures by independent directors, can an exchange, which is a virtual monopoly, have such lax systems of compliance and, disclosure of ‘related party’ information or conflicts of interest? 
 
Appointments to top positions seem to have been on the whim of the MD with the entire board failing to raise questions and even the vice-chairman, who describes himself as ‘founder’, claiming no knowledge. How can a systemically important institution and first-line regulator have functioned like a private fief? 
 
Lack of Transparency
Ironically, the BSE was converted ‘professionally run’ institution because it operated like a brokers’ club; but, at least, there was competition and elections to the governing board. Remember, it is SEBI that has allowed the NSE to function in this opaque manner. It watched silently as the NSE dubiously fought a central information commission (CIC) order and a Delhi High Court judgement declaring it a public authority under the Right to Information Act. An appeal is dragging before the division bench in Delhi. SEBI needs to end this gaming of the judicial system and force transparency by declaring the NSE a public authority. Will chairman Ajay Tyagi dare to do it? 
 
All these findings clearly beg some obvious questions: Did SEBI’s investigation really want go deep into the issue of individual responsibility? Or is it on the same side as the NSE—wanting to bury the scam with a quick consent order, make a payment and move on without fundamental changes in operations?
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COMMENTS

Aditya G

3 months ago

I think SEBI has become a joke, and that's a concern, for all of us.

ramchandran vishwanathan

3 months ago

we are replicating US in handling financial frauds where only common man is made to pay for the losses & bears the brunt. All the big fishes end up with alternatives with the booty they make out of looting the loopholes in the system. Acche Din will never come as the Government lacks the intent to crack the whip on defaulters . Only Bhashan no action !!

Ashok Senniappan

3 months ago

In Hindi they say ""-When the Niyath ie intention of top people which is a curse to
our nation to give every possible route to escape where is the question of punishing especially when a famous neta son is also involved.There was a joke in the argument by a advocate who is representing for Masrans who argued that I quote" When a Raksha Mantri can have a exclusive IAF Aircraft ,a Railway Minister can have a Saloon for his travel,Why not a Tececom Minister have a Exclusive Telephone Exchange for 1 line?
For which judge asked if the law permits ,he is certainly eleigible for it.So if if it is not in the law you can have it.

Ashok Senniappan

3 months ago

when S. Gurumrthy is shouting from the roof top to investigate the 7500 private lines
to gather information from National Gate way in respect Marans Telephone line scam the CBI is looking the otherway.When SEBI conducted investigation it called for explanation from 14 persons into the HFT scam with 350 pages of investigation what does this mean? They want to give sufficient time for the pepetreaors of the crime to escape? It shows clearly all the people like,SEBI,NSE,and CBI are on the samed page because they have got their pound of flesh in the the qunatity more than expected.So every one will jointly and severally work for the burrial of the report so the truth will come out.

REPLY

Ashok Senniappan

In Reply to Ashok Senniappan 3 months ago

Corrigandum it is- 350 pages of investigaionreport by SEBI to the culprits to explain.what dose it mean?

Amrish Shah

3 months ago

Every time trading when u but price down & when sell price up.algo trade is computer crime

BV SUDHANVA

3 months ago

nee sattange maadu naa attange maadteene.

tanay

3 months ago

What is a consent order? Does it mean that NSE will just pay a token fine, say sorry and no one will be held responsible?

NSE Algo Scam: “Why Is a Forensic Firm Like E&Y Incapable of Drawing Conclusions from Obvious Findings,” asks SEBI’s Technical Advisory Committee
The technical advisory committee (TAC) of the Securities & Exchange Board of India (SEBI) came down heavily on the attitude of Ernst & Young (E&Y) during a meeting held on 14 June 2018 at New Delhi to discuss the revised E&Y report on the infamous high-frequency trading (HFT) scam, or algo scam, of the National Stock Exchange (NSE). Present at the meeting were Madhabi Puri Buch, whole-time member of SEBI; Manoj Kumar, chief general manager, and three other officers of SEBI. TAC is headed by Prof Dr Ashok Jhunjhunwala.
 
E&Y was appointed to examine in detail the allegations of a whistleblower that, in 2014, some brokers were consistently allowed to log into the co-location servers of the NSE ahead of others, following a breakdown in systems and due processes at India’s largest stock exchange. The E&Y report followed two other investigations: by an expert committee appointed by TAC in late-2015 and one by Deloitte, appointed by the NSE in late-2016. 
 
According to the minutes of the meeting, the TAC chairman reviewed the revised reports submitted by E&Y and observed that E&Y, during its forensic audit, has found “additional evidence in terms of data, email communications, etc, which is in line with the findings of the report of Expert Committee and report of Deloitte Touche Tohmatsu,” of December 2016. 
 
However, despite this is clear confirmation of wrongdoing, E&Y, “based on its findings has not arrived at clear inferences/ conclusions, despite the evidences noted during its audit. The Committee wondered why a forensic firm like E&Y is incapable of drawing conclusions from obvious findings and does it compromise as a position of independent forensic auditor in future (sic).”  
 
According to TAC, the underlying principle regarding trading through co-location is the faster access to data that gives a potential advantage to the trading member(s). Therefore, “opportunities to have undue and unfair access by some of the trading members is a gross violation of the basic principle of fair and equitable access irrespective of how much profit a firm was able to make. SEBI can take suitable and appropriate action to ensure that entities including the exchange are penalised and such events do not recur in future,” according to the minutes of the meeting.
 
The whistleblower’s allegations about unfair access granted to some brokers were published first in Moneylife in June 2015, in response to which the NSE filed a defamation case against us for Rs100 crore at the Bombay High Court. The single-judge bench concluded that the NSE was not defamed and fined NSE Rs50 lakh for the frivolous and intimidating suit. (Read: NSE withdraws its Rs100 crore defamation suit against Moneylife, pays Rs50 lakh as cost and penalty)
 
After sitting on the explosive letters from the whistleblower for almost a whole year in 2015 and watching the NSE drag us to court, SEBI was goaded into action by TAC. SEBI first agreed to commission an expert committee headed by Prof Om Damani of the department of computer science of Indian Institute of Technology, Bombay, and then commissioned E&Y to do a complete forensic investigation of the allegations. 
 
E&Y’s initial report was reviewed in December 2017. The TAC made some observations on that report at a meeting held on 14 December 2017. E&Y submitted its revised report in May 2018 on what was going on in the cash and currency derivatives segment of the NSE, without “drawing conclusions from obvious findings“ which attracted the above harsh comments from TAC. (Read: NSE Allowed Preferential Access in Currency Market Too, says E&Y Report: NSE Algo Controversy)
 
You may also want to read…
 
 
 
 
 
 
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COMMENTS

nadeem

3 months ago

Because they don't want to !

svgopal

3 months ago

Its time to develop and encourage Indian Consultancy firms.

REPLY

Ajay Sharma

In Reply to svgopal 3 months ago

Why would they behave any differently??

nadeem

In Reply to Ajay Sharma 3 months ago

Agree

SEBI Issues Show Cause Notice for Dark Fibre Access in NSE Algo Scam
Even as the National Stock Exchange (NSE) is trying to go for a consent order in its algo or High Frequency Trading (HFT) or algorithmic (algo) scam to “put the past behind” and launch its initial public offering (IPO), market regulator Securities and Exchange Board of India (SEBI) has issued a second set of show cause notices on 3 July 2018 in its probe into the algo scam. Starting 2010, certain brokers namely Way2Wealth and GKN Securities used NSE’s co-location facility to get early access to its algorithmic trading systems, gaining an unfair advantage until NSE changed its systems in 2014 to prevent misuse.  
 
The second show cause notices (SCNs) alleges that NSE has undergone practices of denial of services to certain stockbrokers resulting in discrimination and non-adherence to principle of fairness and equal opportunity by allowing Way2Wealth (W2W) and GKN Securities to terminate the connections directly in the rack placed inside the Exchange’s co-location facility. This, the SCN says is in complete contradiction to normal practice followed by NSE. 
 
W2W and GKN were allowed to establish P2P connectivity through service provider Sampark, while many stock brokers who desired to lay P2P connectivity through providers other than the four mentioned in the NSE circular on 31 August 2009, were denied permission by NSE staff. It has also been alleged that NSE lacked a clear documented policy for due diligence of service providers by checking their license while allowing P2P connectivity. 
 
To make matters worse, NSE allowed W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have the requisite Department of Telecommunications (DoT) license. Furthermore, in the process of providing connectivity, a site inspection was conducted for other stockbrokers such as Millennium, GRD and SMC while the same procedure was not followed for W2W and GKN.
 
The notice states “…at the relevant period of time Mr Umesh Jain was CTO of NSE and in this capacity he was responsible for inter-alia, network operation, application operation and hardware and storage management. He was also the supervisor of Mr Deviprasad Singh (Head of colo support, NSE) who had granted permission to Sampark to place infrastructure in NSE, without verifying their license. It was Mr Singh’s responsibility to monitor the cabling and ensure fair and equitable access to all its trading members. As a supervisor of colo support, it was Mr Jain’s duty and responsibility to incorporate checks and balances so that, incidents like cabling to Sampark through W2W rack could have been detected early. The show cause notice claims that he failed to establish procedures to prevent such lapses.” 
 
The notice further names Chitra Ramakrishna, acting MD and CEO of NSE at the time, as it was her duty and responsibility to create investor confidence in the integrity of the market and also to ensure that the stock exchange abides by all the provisions of SEBI. Subramanian Anand, Group Operating Officer (GOO) & Advisor to MD and Ravi Varanasi, Head of business development function have also been asked to reply to the SCN.
 
The conduct of NSE and W2W of continuing usage of the Sampark line even after knowing that they did not have the requisite licenses for providing such connectivity, points towards collusion amongst them for the express benefit of W2W. Accordingly, SEBI has named W2W’s CEO R Shashibhushan, and Directors CK Nithyanand and BG Srinath in the SCN. Similarly, GKN was also a direct beneficiary of preferential treatment as they too continued to avail the services of Sampark until September 10, 2015. Thus, SEBI has named partners of GKN Securities Sonali Gupta, Om Prakash Gupta and Rahul Gupta in the notice as well. 
 
Finally, Sampark acted in collusion with W2W and NSE to lay the cabling in such a way that W2W had lower latency compared to other trading members connected to the line. Accordingly, Prashanth D’souza, CEO of Sampark has also been issued this notice as it was his responsibility to not indulge in manipulative, fraudulent or deceptive transactions or scheme and abide by all the provisions of law while dealing in its business.
 
SEBI has requested the noticees’ to provide a reply to the show cause notice along with any supporting documents within 21 days of the receipt of the notice. Failure to do so, allows SEBI to assume that noticees have no reply to submit and accordingly proceed to take action in accordance with the law and the SEBI Act.
 
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Ashok Senniappan

3 months ago

NSE have their logo to "An Stock Exchange for Selective looters with right connections"

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