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letter to Moneylife leading to the NSE filing a Rs100 crore defamation against this publication, which was subsequently withdrawn, with the exchange paying a fine of Rs50 lakhs levied by the court.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…