NSE Algo Scam: Is SEBI’s Shoddy Investigation Designed To Hide Its Own Incompetence?
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.
 
The whistleblower’s allegations about unfair access granted to some brokers were published first in Moneylife in June 2015, in response to which 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)
 
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COMMENTS

Urmila Kumari

3 months ago

I don't think any institution in this country prevent this kind of manipulation because they are not capable

RAMANI N .V.

3 months ago

A Right step long overdue.

Madras HC Issues Notice to SEBI in NSE Algo Scam
The Madras High Court, last week, had issued a notice to market regulator Securities and Exchange Board of India (SEBI) in the matter of suspected multi-crore fraud involving employees of the National Stock Exchange (NSE), says a report.
 
According to a report from Times of India, while admitting a plea filed by advocate A Kumar, the Madras HC directed SEBI to respond to the notice in two weeks. The issue pertains to various offences, including alleged preferential access given by NSE employees to select stock brokers through co-location facility.
 
When the plea came up for hearing, senior counsel for the petitioner P Wilson was quoted by the newspaper as saying, “The wrongful gains by the select brokers by this illegal preferential access through co-location service of NSE cannot be quantified exactly, but is likely to run into several thousand crore per year over five years as NSE trading volume was 2 to 3 lakh crore per day, and co-location accounted for 25% of the total turnover of NSE by 2014.” 
 
This fraudulent practice in the NSE co-location scandal is a mother of all insider trading and is of infinite value which should attract the maximum punishment, Mr Wilson added. 
 
In his petition, Mr Kumar had alleged that the NSE introduced co-location services without approval from the market regulator.
 
Mr Wilson told the Court, “Although the Central Bureau of Investigation (CBI) had already filed first information report (FIR) in the case against the NSE, independently SEBI also under the Securities and Exchange Board of India Act, should conduct investigation, which has not been done despite representation given by the petitioner on 6 July 2018."   
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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?

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