The market regulator, the Securities and Exchange Board of India has finally delivered its verdict in the case pertaining to unfair access provided to certain trading members to NSE’s colocation facilities. After an spending an inordinately long time on investigation, the regulator has decided that, though it cannot be concluded that NSE has committed a fraud, the exchange has violated Regulation 41(2) of the SECC Regulation, 2012, that requires exchanges to provide equal, fair and transparent access to all persons in the securities market. The investigations, which were conducted by as many as seven different committees, including a cross-functional team of SEBI, Technical Advisory Committee of SEBI, and other committees comprising officials from Deloitte, Indian School of Business and EY, have helped establish that the exchange has not exercised the required due diligence in putting together the Tick-By-Tick architecture at its colocation facility. This had led to few entities gaining unfair advantage over others by logging into the system first or gaining access through the secondary server, where the traffic was less. SEBI has rightly held that information dissemination in the period between 2011 and 2014 was not fair and equitable.

The SEBI order helps send a few clear messages to market infrastructure institutions. One, exchanges cannot act in a way that erodes the trust of investors in the markets. Two, that no market intermediary institution, however large, can flout the regulations and hope to escape without any impact. Three, exchanges have the responsibility to ensure that all the processes are well-documented and supervised. SEBI’s investigations had shown that NSE did not have defined policies and procedures around secondary server access, except for scant mention in some guidelines. There appears to have been no documented policy or procedure on admonishing trading members from connecting to the secondary servers. It was found that the responsibility of monitoring of connections by members to the secondary server was left to junior staff and was not supervised. Such gaps in processes possibly exist in other exchanges. This order sends the message to all exchanges to plug loopholes.

While SEBI is right in prohibiting NSE from accessing the securities market for six months and in asking the exchange to carry out internal checks regularly, the ‘punishment’ of asking the exchange to disgorge close to ₹1,000 crore, appears light, given that stock exchanges are a key part of the market infrastructure, and are first-level regulators. Though the exchange has taken corrective action by adopting Multicast TBT system from April 2014, due to which issues related to benefits from early connectivity and sequential dissemination of ticks have been addressed, it is alarming that processes were weak enough to allow junior employees to collude with market participants. Merely rapping the exchange for lapses does not adequately fix responsibility.

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