Algorithm controversy: Sebi issues show-cause notices

(The move is expected to bring more transparency in the time to come and further evolution and expanding of a futuristic Algorithmic Trading Market)

Capital market regulator Securities and Exchange Board of India (Sebi) has issued show causes notices (SCNs) to the National Stock Exchange (NSE) and 14 individuals as a part of probe against the exchange in the ‘unfair access’ controversy.

All you need to know about the case:

The case dates back to 2015 when the market regulator received three complaints letters highlighting flaws in NSE’s algorithm trading systems. The letters also made allegations of “unfair access” to certain brokers at the exchange’s collocation facility.
According to the letter, between 2011 and 2014, the set up at NSE allowed certain brokers (who connected first to the exchange’s system) received data ahead of others and thus were able to react to information before anybody else.

Following the letters, Sebi sets up a team to do fact-finding of the complaints in late 2015. Based on the preliminary finding, the Technical Advisory Committee (TAC) of Sebi constituted a committee to further examine the allegations against the country’s largest stock exchange.

In March 2016, the expert committee submitted its report to Sebi. The committee makes critical observations against the bourse stating it violated norms of fair access by allowing some brokers to benefit. It also alleged that the exchange didn’t immediately initiate any steps to check possibility of collusion between its staff and brokers. The expert committee also highlighted that NSE’s systems were prone to manipulation and as a result one OPG Securities was able to exploit its systems.

In November 2016, NSE appointed Deloitte to conduct the forensic investigation.

NSE submitted Deloitte’s report to Sebi on December 23, 2016. The key report also suggested NSE’s systems were prone to manipulation. It also says there was lack of documented policies and protocols on dissemination of data, data retention among other things.

In January, Sebi directed NSE to submit a comprehensive action plan to address the issues and findings raised in the forensic report. It also asks the bourse to submit a roadmap and action plan in two weeks to address issues raised in the report and details on technological and procedural changes required at NSE. The exchange submitted a comprehensive report to Sebi on the new systems and process put in place.

In February, Sebi said the majority of directions issued have been implemented by NSE, while some are yet to be implemented.

In March, Sebi directed NSE to conduct carry out an audit on its currency derivatives and cash segment to check whether the systems used in these categories are also prone to manipulation. The exchange appointed EY to carry out the said audit.

In April, Sebi Chairman Ajay Tyagi had said co-location issue will take a few months time to get addressed.