NSE Co-location Case: SEBI Drops Charges Against NSE and Officials

What’s in today’s article?

• Why in News?
• What is National Stock Exchange of India (NSE)?
• Co-location case
• SEBI Clears NSE and Officials of Wrongdoing in Co-location Case

Why in News?

• The Securities and Exchange Board of India (SEBI) has dropped charges against the National Stock Exchange (NSE) and seven of its former top officials, five years after penalizing them for lapses in high-frequency trading through NSE’s co-location (colo) facility. 
• SEBI had previously ordered the NSE to disgorge Rs 624.89 crore and barred the officials from associating with listed companies or market intermediaries for five years. With the charges now disposed of, this decision clears the path for NSE's planned mega IPO.

What is National Stock Exchange of India (NSE)?

• About
  • NSE is India's largest financial market. Incorporated in 1992 and launched in 1994, the NSE has developed into a sophisticated electronic market.
  • Headquartered in Mumbai, NSE introduced automated trading systems that replaced the open-outcry system, improving transparency, speed, and efficiency in the Indian stock market.
• Market capitalization
  • As of December 2023, the NSE was the sixth-largest stock exchange in the world, as measured by market capitalization.
  • In January 2024, its market capitalization and that of the Bombay Stock Exchange (BSE) totaled $4.33 trillion, making India the fourth-largest stock market worldwide.
• Key Features of NSE
  • NIFTY 50: NSE’s benchmark stock market index, consisting of 50 of the largest and most liquid Indian companies, which reflects the overall market performance.
  • Electronic Trading: NSE was a pioneer in adopting fully electronic, screen-based trading systems, revolutionizing Indian stock trading by making it more accessible and efficient.
  • Market Segments: It offers trading in multiple market segments, including:
    • Equity; Derivatives (futures and options); Currency Derivatives; Debt
• Regulatory Oversight
  • NSE is regulated by the Securities and Exchange Board of India (SEBI), ensuring compliance with rules and maintaining fair practices in the market.

Co-location case

• NSE faced allegations of granting preferential access to certain brokers through its co-location (colo) facility between 2012-2014. 
  • Colo facility at the NSE allows brokers to keep their servers near the exchange's servers.
  • This might give them an advantage over other brokers:
    • Faster data transmission - Orders placed by brokers with co-location servers reach the exchange faster than those without. 
    • High frequency trades - Co-location allows brokers to get price feeds nanoseconds faster than the rest of the market. 
• A whistle-blower raised concerns in January 2015, reporting to SEBI that some brokers gained unfair advantages by using better hardware and early login.
  • The unfair access issue pertains to 2012-14 when NSE used to disseminate price information through a unicast system. 
  • In such a system information is disseminated to one member after another.
  • The letter to Sebi alleged that sophisticated market manipulation has been taking place for several years at the NSE co-location centre.
• It was facilitated by “dark fiber,” which allowed split-second faster access to the exchange’s data feed. 
  • Dark fiber - which is also known as unlit fiber or black fiber - is an unused optical fiber that has been laid.
• This speed advantage, critical for algorithmic trading, allegedly led to market manipulation. 
• It was also claimed that NSE permitted non-empanelled internet service providers (ISPs) to install fiber networks for select brokers, exacerbating the unfair access issue.

SEBI Clears NSE and Officials of Wrongdoing in Co-location Case

• Examination of Previous Evidence
  • According to SEBI’s latest order, the evidence and facts in the current show-cause notice were already part of earlier investigations. 
  • These materials were examined by the Securities Appellate Tribunal (SAT).
  • SAT had concluded that there was no violation of Prohibition of Fraudulent and Unfair Trade Practices or Stock Exchanges and Clearing Corporations regulations by NSE or its employees.
• Lack of Proof for Collusion or Connivance
  • SEBI noted that while establishing collusion or conspiracy would require a higher burden of proof, no such evidence was found. 
  • The regulator emphasized that the establishment of a conspiracy would need clear indications of "secret or indirect consent," which was not present.
• OPG Securities and Secondary Server Access
  • The order highlighted that OPG Securities continued logging into the secondary server until May 2015, even after a warning in June 2012, which suggests indirect consent from NSE. 
  • However, since 93 other trading members also logged into the secondary server during that time, SEBI determined the probability of collusion was low.

Q.1. What is the NSE co-location case? 

The NSE co-location case involved allegations of preferential access granted to certain brokers for faster trading through the exchange's co-location facility during 2012-2014.

Q.2. What was SEBI's final verdict in the NSE co-location case? 

SEBI cleared the National Stock Exchange and its officials of charges, finding no evidence of collusion or conspiracy in high-frequency trading practices.

Source: NSE co-location case: How Sebi found violations in 2019 but saw no evidence in 2024

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