Sebi issues show-cause notice to NSE officials
The Securities and Exchange Board of India (Sebi) has questioned whether directors of the National Stock Exchange of India failed in their fiduciary responsibility of maintaining market sanctity in its show-cause notices on the matter of unfair access to certain brokers while using the bourse’s algorithmic trading platform.
Separately, the capital markets regulator is also investigating whether any officials had connived with brokers and made illegal gains, said two people aware of the matter.
The show-cause notices issued to NSE and some of its officials, both current and former, ask why action should not be initiated against them for allegedly violating the Stock Exchange and Clearing Corporation (SECC) regulations and Prevention of Fraud and Unfair Trade Practices (PFUTP). These showcause notices have been issued under Section 11 of the Sebi Act, said one of the people.
first reported on Saturday that showcause notices were sent to NSE last week.
According to the two people cited earlier, notices have been sent to Ravi Narain, vice-chairman of NSE, who was serving as chief executive officer and managing director at the exchange during the period when the alleged violations took place. Other officials include Ravi Varanasi, who heads NSE’s business development vertical and was heading the surveillance department for the exchange during the relevant period and Suprabhat Lala, chief of regulation and head of the trading division during 2010-13.
A spokesperson for NSE said that as the matter is between the exchange and Sebi it will not be able to comment on queries. An email sent to Sebi seeking comments was not answered immediately.
Former officials who have received a show-cause notice include former technology heads, chief operating officer, officials named in the forensic audit report and ex-CEO Chitra Ramkrishna. Ramakrishna did not respond to a text message seeking comments.
“As part of Sebi investigation into the matter, the regulator has sent notices to a few officers in technology and business operations to seek their input. NSE and the employees will take legal advice and respond accordingly. Proper processes are being followed and this will bring the matter to a conclusive end,” said the second of the people cited earlier.
The matter pertains to allegations by a whistle-blower that certain brokers being able to log in to NSE systems with better hardware specifications allowed them unfair access and advantage. The issue was first highlighted by Sebi’s Technical Advisory Committee (TAC) which had recommended a probe against the exchange in April last year. Following this, the regulator in September 2016 had asked to exchange to conduct a forensic audit and deposit the revenues being generated by the co-location facility in an escrow account.
NSE, in its share sale document on December 28, disclosed that the forensic audit by Deloitte India showed that its algorithmic trading platform and co-location facility were “prone to manipulation” and allowed “potential preferential access” to some brokers.
Co-location is a facility which allows the housing of traders’ servers on the exchange’s premises. This allows faster access to data feeds and price information released by exchanges.
The forensic audit could not ascertain collusion between NSE officials and brokers but said that many employees took oral instructions from senior officials in matters pertaining to algorithmic trading. Since then NSE has redrafted its algo policy.
Separately, Sebi is probing around 15 brokers who allegedly received unfair access and showcause notices would be issued to them soon. NSE is undergoing a second forensic audit of its systems by EY on its cash, currency and equity platform.