Colo troubles

| Updated on June 03, 2018 Published on June 03, 2018

The regulator needs to quickly decide on the NSE colocation issue if its credibility is not to be compromised

The inordinate delay by the Securities and Exchange Board of India (SEBI) in closing the National Stock Exchange colocation facility case appears set to affect the credibility of the entire stock market ecosystem. With the Central Bureau of Investigation (CBI) suspecting that some SEBI officials may have received bribes for making regulations that were conducive to OPG Securities, the broker who was primarily responsible for engineering the irregularity, time is running out for the regulator. Unless it passes an order soon, there could be aspersions cast on the reasons behind the delay. Eyebrows are already being raised about the manner in which the regulator has been dragging its feet on a matter that first came to light in 2015. That’s when a whistleblower revealed that a handful of brokers were logging in to the NSE’s colocation servers ahead of the others, enabling speedier execution of their automated algo trades.

While the external committee initially appointed by the SEBI found that exchange officials had connived with a few users to allow them to move ahead in the order queue, SEBI did not find the report conclusive enough and asked the exchange to do a forensic audit to further look in to the breach. The report of the independent committee set up by the NSE was also found unsatisfactory and the regulator is currently carrying out further investigations to prove that those who had gained unfair access profited by the breach. The CBI’s findings appear no different from what the previous investigations revealed. It is also unlikely that any new evidence will be unearthed by the ongoing investigations. Emails and other documents to track down the perpetrators are not available. It will also be quite difficult for the regulator to prove that the offending brokerages profited by their act since trading profits are dependent on market price movements.

Irregularities in governance in the country’s premier exchange that accounts for over 95 per cent of equity volume, is without doubt a concern, and needs to be addressed. But the breach in the NSE colocation occurred around four years ago. The exchange has taken corrective action since then and installed another system that is not vulnerable to such cracks. Recent rules put out by SEBI regarding disclosure required by users of colocation facilities also help establish greater equity among participants on the NSE. It is therefore time SEBI makes up its mind and brings the issue to a close. NSE has expressed willingness to settle the case through consent. If the regulator thinks that is not stringent enough, it can slap a penalty on NSE for the governance lapse thus sending the message that such oversights that jeopradise the interest of investors will not be tolerated. Brokerages who have been involved in this misdeed can be divested of their membership to help restore investor confidence.

Published on June 03, 2018
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