Amid the ongoing Income-Tax raids on the premises of former Managing Director of the National Stock Exchange (NSE), Chitra Ramkrishna, and the group operating officer Anand Subramanian, the CBI is believed to have finally closed in on the investigation into the scam in co-location and high-frequency or algorithmic trades. The investigation has been triggered by a Public Interest Litigation (PIL) filed in the Delhi High Court by journalist Shantanu Guha Ray, who urged the Court to issue a writ of mandamus to the CBI to enlarge the scope of its investigation into allegations of fraud and illegality into algo trading.

While the investigating officer concerned refused to comment on the pace of the probe when contacted by BusinessLine, the petitioner, Shantanu Guha Ray, seemed confident that the investigations would reach some conclusion within a few months. The CBI probe is being monitored by the High Court after Guha Ray’s petition was filed on April 6, 2019. The fundamental argument in the petition is that the NSE has “dishonestly destroyed” the principles of scientific and transparent price discovery and equal access opportunities for everyone in the capital market by allowing manipulation of price discovery and preferential access opportunities to selective persons through an illegal co-location service. The petition alleges that besides the NSE brass, including Chitra Ramkrishna, there were “powerful bureaucrats and politicians” at the helm of SEBI and the Finance Ministry who facilitated the co-location and algo fraud.

Algo trading

The NSE, as many other bourses both in India and abroad, routinely permit what is called co-location. Typically, a co-location centre is a data centre that rents equipment, space and bandwidth to retail subscribers, that allows for leveraging economies of scale, more advanced infrastructure and lower latency upgraded security. Algo trades are the product of high-end mathematical modelling, devised to anticipate even microscopic changes in the markets and respond accordingly. The scam in these systems refers to the time advantage and advance market information gained by entities permitted co-location access. This allowed a small handful to allegedly front-run the rest of the market.

The PIL makes a detailed summary of the circumstances under which Anand Subramanian was appointed in NSE, his proximity to Chitra Ramkrishna, and their knowledge and connivance in obtaining preferential access to privileged information for selected brokers to make gains in the capital market. “...There exists no reason for appointing him (Anand Subramanian) at such a sensitive post of COO with unfeterred powers and access to NSE’s various departments. It was also extremely unusual that he had an office as well as a house on the same floor as Chitra Ramkrishna. In the NSE building, his cabin was located next to the MD and CEO’s cabin, which had an internal door connecting both the cabins. Without Subramanian’s consent, no one was allowed to meet the MD and CEO,” said the petition.

“All the above persons obviously knew that preferential information played a vital role in the capital market. Therefore, they devised a plan for obtaining illegal preferential access through the co-location service. It is abundantly clear that if certain persons start getting sensitive information ahead of others, they would exploit this advantage to make money from such privileged information… It is only through proper investigation that the actual fraud can be ascertained since the NSE has an approximate trading volume of around ₹2-3-lakh crore per day,” said the petition, arguing for an exhaustive CBI probe in the matter.

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