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

    2 years ago

    Because they don't want to !

    svgopal

    2 years ago

    Its time to develop and encourage Indian Consultancy firms.

    REPLY

    Ajay Sharma

    In Reply to svgopal 2 years ago

    Why would they behave any differently??

    nadeem

    In Reply to Ajay Sharma 2 years 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

    2 years ago

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

    NSE whistleblower’s 4th letter alleges rigging of currency market; manipulation at NSE
    The whistleblower, whose letter was first published by Moneylife, leading to a massive investigation into the National Stock Exchange (NSE) has written a fourth letter addressed to the SEBI (Securities and Exchange Board of India) chairman, which alleges that many of the problems identified by him remain unaddressed despite the apparently sweeping investigation. 
     
    The whistle-blower has also alleged rigging in the rupee-dollar trading that gives an unfair advantage to some companies based overseas, and cautioned the problem could spread to the commodities markets. He also says that the National Stock Exchange (NSE) has much more to do to prevent manipulation in stock markets and make trading systems more transparent and fair.
     
    It may be recalled that the whistleblower (who calls himself Ken Fong) had copied his first letter to Moneylife leading to the NSE filing a Rs100 crore defamation against this publication, which was subsequently withdrawn, with the exchange paying a fine of Rs50 lakhs levied by the court. He followed up with two more letters, the last of which was addressed to this writer. This fourth letter, dated 14 February 2017, which forms a part of the second round of show cause notices issued by SEBI to was addressed to Ajay Tyagi, when he was with the Ministry of Finance.
     
    The detailed, 12-page letter claims that many of the problems remain. The irregularities at the NSE and in some cases, the Bombay Stock Exchange, and the methods used to go around the systems. He has highlighted `various transgressions', alleging the lapses are because of negligence of the exchanges, and in some cases their unwillingness to function in a more transparent manner. While the letter has made several allegations and named specific names, we have decided to publish it because it forms a part of SEBI’s detailed show cause notice to NSE officials. Moneylife is publishing a series of articles based on these notices including feedback from the private companies, exchanges and brokerages involved. We will also update this article with any comments or feedback we receive from them. A copy of the letter is available below. 
     
    The whistleblower makes eight key points this time. They are… 
     
    1. That old problems remain on the size has changed from milliseconds to micro seconds — but unfairness remains. In this section he alleges that exchanges are still dragging their feet over transparency measures and provides complex technical details to make his case. 
     
    2. Lack of control over market abusive practices such as spoofing and flashing orders: The whistleblower alleges that exchanges pay lip service to this objective but have not done enough. His charge is that preventing order modification is not enough, order cancellation is also a problem. In this case, the whistleblower has issues with how both national exchanges the NSE and the Bombay Stock Exchange (BSE) have handled the issue despite time-stamped data being available for audit. 
     
    3. Exchanges create policy and commercial impediments to prevent equity across firms alleges the whistleblower. In this section, he alleges that both exchanges have a ‘comfort zone’ with select firms who support their policy initiatives and new products. This section raises issues with how BSE is allegedly creating ‘non-commercial impediments’ while NSE introduced ad hoc ‘volume discounts’ for short periods  and tweaks the criteria to benefit some firms instead of having a clear, transparent policy. 
     
    4. Access to USD_INR feeds prohibited in India is enjoyed by select firms via global links.  There are some serious charges here and the whistle blower alleges that certain global firms like Tower Capital have benefitted from access to US data. The whistleblower had made these allegations in the third letter addressed to this writer, which is also a part of the show cause notice.
     
    5. Inter exchange colocation links continue to be tweaked illegally. In this section the whistleblower makes another serious charge that although official billing for the collocation links are through official vendors, the actual networks continued to be owned by unlicensed vendors. The basis of the allegation is explained in detail. 
     
    6. Transgressions at commodities exchanges continue even as options are about to be introduced, claims the whistleblower. In this, he goes on to what was happening at the controversial MCX before SEBI’s investigation and the change in management. 
     
    7. NSE is burying the dark fibre issue claims the whistleblower, however the new set of show cause notices issues by SEBI are over this issue. 
     
    8. Action against entities which abused the system remains, he says. However, again, the latest show cause notices cover several brokerage firms who have been called and their testimony recorded. 
     
    This article will be updated with any responses from those who are mentioned in the whistleblowers letter.
     
    Here is the fourth letter from the Whistleblower…
     
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