As Sebi Orders NSE to 'Disgorge' Rs 1,000 Cr, Here's All You Need to Know About the Co-location Case

Stock Market regulator Securities and Exchange Board of India (Sebi) on Tuesday ordered the National Stock Exchange of India Ltd (NSE) to disgorge Rs 1,000 crore with 12 percent per annum interest for having violated Stock Exchanges and Clearing Corporation (SECC) regulations. Here’s everything you need to know about the case:

What is the NSE co-location case?

The co-location case dates back to 2015, when a whistleblower wrote a letter to Sebi alleging that NSE was giving a few high-frequency traders and brokers preferential access to its trading platform.

Between 2011 and 2014, under co-location services, some brokers who were trading from the same premises where NSE’s algorithmic trading servers were located were able to get faster access to the trading systems, thereby gaining an unfair advantage over others.

The whistleblower had alleged that some brokers had figured out that the way to manipulate the system by becoming the first one to connect to the server--preferably the one which was the fastest.

What did Sebi say in its order?

The Sebi order said NSE had failed to ensure equal and fair access to all members when they were using its algorithmic trading platform and co-location services.

Sebi said NSE committed fraudulent and unfair trade practice as contemplated under the Sebi PFUTP (prohibition of fraudulent and unfair trade practices) regulations.

“It is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place the TBT architecture,” G. Mahalingam, whole-time member of Sebi said in the order. Tick-by-Tick (TBT) is a data feed, which provides information regarding every change in the order book on the NSE.

How has NSE been penalized?

Sebi asked NSE to “disgorge” its profits from co-location worth Rs624.89 crore at 12% interest to the Investor Protection and Education Fund (IPEF). The amount with interest would add up to about Rs1,000 crore.

NSE now also cannot introduce any new derivative product in stocks or commodities for the next six months.

This also implies that the exchange will not able to come out with its IPO during this period.

NSE has been directed to audit its systems at frequent intervals.

Sebi has also issued orders against 16 individuals, including former managing directors and CEOs Ravi Narain and Chitra Ramkrishna.

Narain and Ramkrishna have been ordered to disgorge 25% of their salary drawn for FY11 to FY13 and 25% of the salary drawn for FY14, respectively, to IPEF, within the next 45 days.

Both these former officials have been prohibited from associating with a listed company or a market infrastructure institution or any other market intermediary for five years.

The orders will not impact the functioning of NSE and it will continue to run when equity markets open on Thursday.

Sebi has also barred OPG Securities, allegedly the prime beneficiary of the co-location matter, and its directors from accessing the securities market for five years, while directing the entities to disgorge nearly Rs25 crore.

Ajay Shah of Indira Gandhi Institute of Development Research has also been restrained from holding any position with a stock exchange or a listed company for two years.