The Securities and Exchange Board of India (SEBI), on Friday, imposed penalties of Rs12 lakh and Rs6 lakh on CPR Capital Services Ltd and PRB Securities Pvt Ltd, respectively for multiple violations with respect to using National Stock Exchange (NSE)'s co-location (Colo) facility.
SEBI said, both trading members indulged in unfair trade practice by repeatedly connecting to the secondary server. The two separate but similarly worded orders are yet another example in a long series of ‘too late and too little’ penal actions from the market regulator and its failure to crack the whip and bring to book errant, petulant trading members.
SEBI had received multiple complaints pertaining to allegations of malpractices with respect to the co-location facility being provided by NSE. In the wake of allegations of preferential access to tick-by-tick (TBT) data feed given by the Exchange to certain trading members (TMs), SEBI ordered a detailed probe.
CPR Capital Securities and PRB Securities were two of the trading members identified for comprehensive investigation, including forensic audit, for primary and secondary server connects.
In 2015, an anonymous whistleblower had written to Sucheta Dalal. managing editor of Moneylife alleging that some trading members on the NSE, who had subscribed to the Exchange’s co-location server facility were getting an unfair advantage by way of faster access to the Exchange. The whistleblower also alleged the collusion of NSE officials.
It may be recalled that Moneylife
was the first to expose this scam in mid-2015
, for which NSE had filed a defamation case against us. A single-judge in Bombay HC dismissed the frivolous suit and ordered the NSE to pay a fine of Rs50 lakh (mainly to two Mumbai hospitals). After filing an appeal against the order, NSE paid up the penalty. Meanwhile, in the wake of the scam, the top brass of NSE had to resign and a new management team took charge.
In the colo issue, there were two detailed reports. One by SEBI’s Technical Advisory Committee (TAC)
and the other one was a forensic audit report from Deloitte. The detailed investigation by TAC and forensic audit by Deloitte pointed out how brokers could get advantage in connecting to the NSE’s servers because the Exchange had no ‘load balancers’ and ‘randomisers’ in its systems architecture. Debashis Basu, editor of Moneylife
had written about how NSE had quietly and illegally started TBT high frequency or algo trading
(HFT) and co-location services in January 2010 while SEBI looked the other way.
A comprehensive investigation, including a forensic audit, of the two entities (CPR Capital Services Ltd and PRB Securities Pvt Ltd) was carried out and reports submitted to SEBI in 2019. Ernst & Young LLP did the probe of CPR Capital Services and that of PRB Securities was carried out by Deloitte Touche Tohmatsu India LLP.
The investigation period varied from June 2010 to November 2014, depending on the segments. It was June 2010 to April 2014 for futures and options (F&O), October 2010 to November 2014 for cash market (CM) and January 2012 to April 2014 for currency derivatives (CD).
As per NSE's co-location guidelines, secondary source for TBT data is to be used only in case of non-availability of data from TBT primary source and the trading members should not routinely connect to the secondary server. Detailed investigations found that these two entities continuously logged into the secondary server in F&O, CM and CD segments without any valid reason.
In the two new orders which came out on Friday, SEBI said that the secondary server was meant for use in case of non-availability of data from the primary source.
By circumventing the primary source on a regular basis, the entities ''engaged in conduct which undermined the trading system set up to provide fair and equitable access to all brokers who connected to it,'' SEBI said in the orders.
SEBIs adjudicating officer Prasanta Mahapatra also noted that CPR Capital Services continued to connect to the secondary servers despite NSE reprimands. In the case of CPR Capital Services, SEBI also observed that it had failed to provide complete information to the investigating authority during investigation.
''The noticee has connected to the secondary server in the CM, F&O and CD segments during the relevant period even after reprimand from NSE and also failed to provide complete information to the IA (Investigating Authority) during investigation,'' SEBI said in its order passed against CPR Capital Services.
CPR Capital Services contended that it had no knowledge about secondary server, reprimand mails received from NSE, and verbal suggestion of NSE to connect secondary server.
SEBI refused to accept this contention and pointed that the colo guidelines are addressed to all trading members of NSE and being unaware of guidelines cannot be accepted as an excuse.
Further, the market watchdog also pointed out that NSE in its e-mail advised CPR Capital Services not to connect to the secondary server without intimating the Exchange. SEBI said, “It is evident from the e-mail correspondences between CPR Capital Services and the NSE that CPR Capital connected to the secondary server in multiple IPs even after getting reprimanded by NSE.”
“The said correspondences indicate the concerns of NSE and the requirements that the Noticee had to follow i.e., connecting to secondary server can be done only if it is unable to connect to the primary server. The language and the tenor of the said email demonstrate the intent of the NSE to convey its concern or objection to the Noticee’s connecting to the secondary server and expectation of positive compliance by the Noticee. The reasonable and legitimate expectation from the Noticee would be that it will adhere to all such rules and procedures as required by NSE from time to time in writing or otherwise. In this case, it is established that the Noticee had connected to the secondary server on several occasions and the same was not disputed by the Noticee,” SEBI said.
While passing the order against PRB Securities, SEBI said that the trading member was not reprimanded by NSE for the violations, unlike some other brokers who had more frequent secondary server connections.
''However, it is established that the noticee has failed to comply with aforesaid guidelines and hence violated the aforesaid provisions of Code of Conduct specified under Stock Broker Regulations, 1992 and PFUTP Regulations, 2003,'' the order said. PFUTP refers to Prohibition of Fraudulent and Unfair Trade Practices.