India’s markets regulator has closed proceedings in the co-location case against the National Stock Exchange and its officials, citing a lack of evidence.
Kamlesh Varshney, a whole-time member of the Securities and Exchange Board of India, on Friday held that due to the absence of sufficient material, the test of “preponderance of probability” failed to produce enough justification to establish any collusion between brokerage OPG Securities Pvt. Ltd and NSE.
Co-location allows brokers to place their servers on a stock exchange’s premises for a fee, allowing them to receive price data feeds fractions of a second before other participants.
The issue arose in 2015 after three whistleblowers complained to Sebi that some brokers got preferential access at NSE’s co-location facility for early login, resulting in huge gains for those brokers to the detriment of other brokers on the same premises.
A Sebi committee investigating the allegations found that the architecture of NSE (for dissemination of tick-by-tick data) was prone to manipulation and market abuse.
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Sebi identified 15 stockbrokers for investigation in the case and in 2018 the Central Bureau of Investigation filed a case against OPG Securities for allegedly manipulating the system for 2 years to get first access to markets when they opened.
For the alleged lapses in high-frequency trading offered through the co-location facility, Sebi directed NSE to disgorge ₹624.89 crore and barred it from accessing market funds for six months. The Securities Appellate Tribunal, following an appeal by NSE, reduced this amount to ₹100 crore.
Sebi had also directed OPG Securities to disgorge ₹15.75 crore with interest, which was set aside. The matter was remanded back to Sebi to decide on the quantum of penalty against OPG.
A lack of due diligence
After re-adjudiation of the case, Sebi concluded that NSE did not have a detailed defined policy for use of the co-location facility and that it failed to monitor the use of its secondary server by the trading members. “Issuance of guidelines without its monitoring showed lack of due diligence,” Sebi said in its order.
However, Varshney stated that this aspect alone would not help to decide whether there was collusion between OPG Securities and NSE and its directors.
“The fact that OPG was logging on to the secondary server till May 2015, even after the warning in the first half of June 2012 does indicate indirect consent by NSE to OPG. The fact that 93 (trading members) were logging to the secondary server during this period reduces the probability of collusion,” the order stated.
Varshney also noted that despite multiple forensic reports of Deloitte, EY and the regulators’ external committee, no evidence had been reported. Accordingly, the proceedings against all noticees, including NSE and its officials, were disposed of without any directions.