TAC Report Proves Systemic Lapses at the NSE
Will SEBI initiate ‘immediate action’ on lapses and constitute a team with ‘appropriate background ’ as recommended by its own expert committee?
 
The powerful technical advisory committee (TAC) of the Securities & Exchange Board of India (SEBI) conducted a detailed investigation of the National Stock Exchange’s (NSE) high frequency trading (HFT) and vindicated the contentions of an anonymous whistleblower who wrote three letters on how the Exchange’s trading systems gave better access to certain entities allowing them to make huge profits.
 
TAC’s investigation team prepared a detailed report and discussion of its findings and follow-up have been extensively reported by The Mint and Bloomberg. Moneylife too has perused a copy of the findings discussed by TAC at SEBI. But before we proceed further, a quick recap of the issue. Readers of Moneylife know that the NSE has filed a Rs100-crore defamation suit against us for bringing the contents of the letter to public attention sometime in June 2015. A notice of motion to gag us until the suit comes up for hearing was, however, shot down by Justice Gautam Patel of the Bombay High Court, who also ordered the NSE to pay Rs50 lakh as penalty mainly to two hospitals in Mumbai. Unknown to us, the whistleblower sent a second letter to SEBI in August 2015 detailing how it can verify his allegations of how NSE’s systems were compromised. SEBI kept mum about this even as it watched the outcome of NSE’s defamation charge against us. 
 
In October 2015, the whistleblower sent me a third letter which would prove his charge that certain influential entities managed to rake in huge profits through preferential access. This was sent only to me, but had explosive information on a ‘dark fiber’ link between the NSE and the Bombay Stock Exchange (BSE) which allowed a huge advantage to a third entity. We decided to share the letter with SEBI and the finance ministry, since our intention was to bring the truth before the people through proper investigation. 
 
Before we go into TAC’s findings, let me explain what HFT, or algo trading, is. These are automated trades conducted at millisecond or microsecond speeds throughout the day by computer programs developed to process market data. They buy and sell large quantities of securities, based on price patterns without human intervention, making huge profits from wafer-thin margin on massive volumes. It is these that explain the massive froth of trading turnover running into over Rs1 lakh crore every day. 
 
With this background, we will let the findings of SEBI’s TAC speak for themselves. TAC, chaired by Dr Ashok Jhunjhunwala, met on 15 March 2016 to discuss a report submitted by Prof Om Damani who was entrusted with the task of investigating the whistleblower’s letters. TAC recorded its thanks to Prof Damani for his ‘outstanding efforts’ and also noted that his project team of IIT-Bombay had undertaken a data analysis that was in the nature of a forensic audit. It then took note of the following findings confirmed from the whistleblower’s letter. 
  1. Technical details about 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.  
  2. That OPG Securities, a brokerage firm mentioned in the first letter, had, indeed, tried to exploit loopholes and it is ‘plausible’ that OPG and some other brokers were given preferential access to back-up servers. More importantly, that OPG ‘gained materially’ by exploiting the system. In this connection, it further said that while it has studied data and submissions from the NSE, “It is not possible from the data available alone to investigate and determine the extent of collusion of NSE officials with OPG/ others.” 
  3. The team also found that OPG’s ability to happily exploit the system ended when the system architecture changed. The committee agreed “that OPG Securities was able to exploit the architecture to gain undue and unfair advantage and NSE failed to prevent such manipulative practices by OPG.”
  4. The team found that the architecture of NSE with respect to dissemination of Tick-by-Tick (TBT) through TCP/IP was prone to manipulation/abuse. When SEBI requested NSE to investigate this, NSE claimed that their architecture could not be, and has not been, misused. In spite of NSE not providing adequate details on the issue, the available data was examined and the report conclusively shows that OPG consistently logged in to the servers with better hardware specifications. It also finds that information on back-up servers was not transparently communicated to all brokers in 2011-12 and earlier.
  5. From the third letter, it was confirmed that the staff of Sampark Infotainment, visited NSE on multiple occasions for laying fibre cables, installation, etc, on behalf of Ways2Wealth and GKN. The whistleblower had contended that Sampark had provided a ‘dark fibre’ link to Ways2wealth, giving better access. Here is what the TAC-commissioned report says, “With regard to the issue of dark fibre, the Committee was of the view that in violation of its own policy on allowing only ISPs, NSE allowed non-ISPs like Sampark, to lay fibre in its premises for various members.”
  6. The report further said that NSE had “violated norms of fair access and allowed some brokers to benefit. Also, when the complaint was made to NSE, its management had dismissed it and did not initiate any steps to check the possibility of any collusion with the staff of NSE.”
TAC did not stop at merely accepting the report.  It says, “SEBI may initiate immediate action for lapses on the part of NSE and exploitations made by OPG under the guidance of the Committee,” and that SEBI should constitute a team of people with appropriate background to “investigate the collusion aspect between NSE officials and OPG.” 
 
We are delighted that a full investigation by TAC has brought some larger issues to attention which the committee plans to discuss, review and examine in future.  First is the all-important issue of how to build capacity within SEBI to proactively detect wrongdoing/ system abuse at the brokers’ end and inside stock exchanges. Secondly, whether the “fibre connectivity between two co-location facility provides any unfair advantage to the brokers vis-à-vis retail players/ investors.” In fact, regulators around the world are debating the second issue of how automation has made retail investors as well as institutional investors outside the HFT group into second-class investors. But, so far, hapless and disaggregated investors have been losing the battle because they do not have a powerful and united voice. TAC plans to go deep into the larger issue of “the robustness of the architecture of NSE and BSE and whether randomisation needs to be introduced” as well as SEBI’s policy with regard to co-location and algorithmic trading, its impact and the actions that are required. 
 
As always, we have emailed SEBI chairman and NSE’s top brass as well as several members of the NSE’s board of directors, but have received no reply to findings of the TAC. The responses from OPG Securities and Ways2Wealth are already in the public domain; the former has denied the findings. 
 
Interestingly, after details of SEBI’s findings were published by various media entities, the Association of National Exchange Members of India (ANMI), which represents 900 members, is understood to have told the news agency Bloomberg that it plans to take up the issue with the regulator. 
 
Clearly, the battle to get at the truth is far from over. NSE’s defamation case against us and appeal against Justice Gautam Patel’s order persists. Let us not forget that the finance ministry as well as the Standing Committee of Parliament have asked SEBI for a copy of TAC’s report. It remains to be seen if they initiate any action. 
 
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected])
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    COMMENTS

    Ramesh Poapt

    4 years ago

    dirt coming out!! clean India begun well...! tip of the iceberg?!

    AVINASH BHOSALE

    4 years ago

    Great work...though most of beyond my comprehension. People like u are the ultimate rays of hope in chaos around us. Keep going on. We are with u. May the justice served in time.

    Harish Kohli

    4 years ago

    Sucheta's remark "Most readers wont even subscribe." is telling. Earlier she had written that the people who gained substantially from the Moneylife helplines did not care to support the people who helped them.

    Meenal Mamdani

    4 years ago

    MoneyLife is incredibly brave to pursue the giants in the interest of justice.

    This is also happening in USA. The link below will explain how Investors Exchange is being stymied by SEC. Why, one wonders.
    http://www.nytimes.com/2016/04/10/busine...

    Parimal Shah

    4 years ago

    Why can ahigh cour not take suo oto action in this case when wrong doing is in the print media?
    Why is moneylife not filing a PIL on behalf of retail investors?
    -Parimal

    REPLY

    Sucheta Dalal

    In Reply to Parimal Shah 4 years ago

    BECAUSE Moneylife has no money. When you take on the powerful, you make enemies. That prevents you from becoming rich and loaded.

    Most readers wont even subscribe.

    So sorry, we struggle in the little way we can and do our bit within our limited means!!

    Harish Kohli

    In Reply to Sucheta Dalal 4 years ago

    Sucheta's remark "Most readers wont even subscribe." is telling. Earlier she had written that the people who gained substantially from the Moneylife helplines did not care to support the people who helped them.

    'Indian pharma market growing at over Rs.2 lakh crore'
    India Skills Report says that 21.05% of candidates for management positions in 2016 will be hired in the pharma and healthcare sectors
     
    India's pharmaceutical industry, with a market size of over Rs.2 lakh crore, ranks third in volume and 13th in value across the globe, it was announced on Sunday.
     
    "The pharmaceutical industry ranks 3rd in volume and 13th in value across the globe and has a market size of Rs.2,52,000 crore as in 2016," the Jaipur-based IIHMR University, which is also a WHO collaborating centre for district and primary healthcare, said in a release here at the end of a national symposium it organised.
     
    "The industry is likely to create over 1.30 lakh jobs in 2016 itself," university president S.D.Gupta said in the statement.
     
    It cited the India Skills Report to say that 21.05 percent of candidates for management positions in 2016 will be hired in the pharma and healthcare sectors.
     
    According to industry chamber CII, India has around 300 large and 8,000 small and medium scale pharma units at present with over 20,000 manufacturers in both the organised and unorganised segments.
     
    "The India pharma industry has 77 percent formulation manufacturers and 23 percent bulk drug manufacturers with 169 FDA (US) approved plants and 153 EDQM (European directorate for Quality (EU) approved facilities at present," the statement said.
     
    "There is a rise in the need for vaccines due to an increase in the sedentary lifestyle giving a rise to chronic lifestyle diseases, which will become dominant in the next 5-10 years," it added.
     
    It further cited India Skills Report 2016 to say that across India, the percentage increase in hiring numbers for pharma and healthcare have been 25 percent and above.
     
    "According to 'Makeinindia.com', the Indian market is the world's 6th largest pharma market and will be the 3rd largest market by 2020. The generics market is expected to grow to $26.1 billion by 2016 from $11.3 billion in 2011."
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Billionaire Mallya pocketed salary, perks as Rajya Sabha MP
    • Mallya, 61, received Rs.50,000 as Rajya Sabha MP's salary and Rs.20,000 per month as constituency allowance between July 1, 2010, and September 30, 2010
     
    Lucknow : Liquor baron Vijay Mallya may be a billionaire, but he did not hesitate to claim amounts as little as Rs.20,000 as perks to which he was entitled to as a Rajya Sabha MP, a reply to an RTI querry has revealed.
     
    In response to a Right to Information query by a Bareilly-based activist Mohammad Khalid Jeelani, the Rajya Sabha secretariat disclosed that the liquor baron -- convicted in a dud cheque case and facing a non-bailable warrant for defaulting on bank loans of around 9,000 crore -- regularly pocketed Rs.50,000 per month as a parliamentarian's salary as well as other perks like constituency allowance and telephone reimbursements.
     
    Jeelani told IANS that he was "shocked by the findings as Mallya was known for his flamboyant lifestyle -- 'living life kingsize'". 
     
    The reply also revealed that while Mallya had not availed of any airfare reimbursements, he happily availed of all other perks and emoluments as member of the upper house of parliament.
     
    Mallya, 61, received Rs.50,000 as Rajya Sabha MP's salary and Rs.20,000 per month as constituency allowance between July 1, 2010, and September 30, 2010. He also pocketed the enhanced sum of Rs.45,000 under this head ever since. 
     
    The billionaire also drew Rs.6,000 per month toward office expenses in the same period and Rs.15,000 thereafter. 
     
    Mallya also raised a bill of Rs.1.73 lakh on calls from his official phone number. Upto 50,000 local calls are free for a Rajya Sabha MP.
     
    However, he did not raise any bills against water and power consumptions and medical expenses. 
     
    Mallya was elected to the upper house in 2002 as an Independent member from his home state Karnataka with Congress and Janata Dal-Secular support.
     
    In 2010, he was re-elected for a second term, this time with the backing of the Bharatiya Janata Party (BJP) and the JD-S. His tenure will end in July.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    User 

    COMMENTS

    Param

    4 years ago

    in no way respecting mr mallya, i did not understand what is wrong with claiming salary & allowances that is part of the job, unless one has deliberately chosen to waive it (like steve jobs).

    Dr Anantha K Ramdas

    4 years ago

    Mallya's flight from India, with a diplomatic passport, raises several points, where a lot of people involved have goofed up at various levels, knowingly or intentionally.

    To start with, it must be remembered that Diplomatic or Government passport can and ONLY be used while on a Government assignment. It cannot be used for private visits.

    In fact, both these passports have jurisdictional restrictions. To the best of my knowledge, a holder cannot travel beyond 50 miles (in good old days) of the arrival city. In other words, if a holder of the above passports should land in London, he/she first has to register his/arrival with the Indian Mission (if holder of Indian passport); if he/she has to travel outside London (beyond the 50 mile limit), permission has to be obtained via the Foreign Office of the country of arrival.

    So it is now hoped that MEA/related office administration must now issue relevant instructions to ensure that the Immigration Officer at the port of exit must be informed well in advance of such a departure so that they are not surprised! The Carrier must also notify the competent authority that a pax with diplomatic/government passport has a booking, say, atleast 72 hours in advance. This can/may be relaxed in case of emergency and for foreign diplomats, accredited to their Missions stationed in the country.

    As for Mallya drawing his salaries and perks, will someone stand up and say if he paid taxes on them in the past? If not, is he exempt?

    By the way, how and when did he acquire the status of an NRI? This is not clear. Besides, his willingness to increase the "settlement" by almost 50% means, he had this extra amount stashed somewhere!!!

    I sincerely trust this episode makes the concerned officials to wake up from their deep slumber!

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