While the National Stock Exchange (NSE) continues to take a hard line against the allegations of manipulation and market abuse in its co-location servers for high-frequency trading (HFT), popularly called the algo scam, the technical advisory committee (TAC), which examined all the evidence on record, is clear that market regulator Securities & Exchange Board of India (SEBI) must take strong action.
According to the minutes of the meeting held on 14 June 2018 in New Delhi, the TAC chairman Dr Ashok Jhunjhunwala noted, “that the underlying principle regarding the trading through co-location is the faster access to data (which) gives potential advantage to trading members. Therefore the Committee noted that 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 how much profit a firm was able to make. Therefore, SEBI can take suitable and appropriate action to ensure that entities including the exchange are penalised and such events do not require in future.”
This strong and clear recommendation of the TAC is important in the light of the consent application filed by the NSE. Under consent terms, an alleged wrongdoer is able to pay up a fine, without admitting or denying any wrongdoing. The TAC seems to be suggesting to SEBI that there is enough evidence to conclude that there was a serious case of market manipulation and market abuse. Since the whole issue is highly technical, TAC’s judgement, conclusion and recommendation is of utmost importance. It remains to be seen whether SEBI accepts the TAC’s recommendations and acts accordingly. The TAC meeting of 14th June also recorded pointwise findings and TAC’s observations of the forensic audit report of Ernst & Young (E&Y).
The TAC chairman reviewed the revised reports submitted by E&Y and observed that the firm, 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.
You may also want to read…