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.
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.
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