Probe gathers pace: Sebi show-cause to NSE, 14 officials in algo trade case

MUMBAI: The probe on high frequency trades which dogged India’s largest bourse National Stock Exchange ( NSE) for the past few years is heading towards its culmination. Sebi has sent show-cause notices to the exchange and its 14 officials — including board member and former CEO Ravi Narain — asking them to explain the alleged irregularities.

While a show-cause to an individual relates to the culpability of the official in question, a show-cause to a regulated organisation like an exchange requires a response from the board of directors and exposes the organisation to possible penal action.

In January 2015, capital markets regulator Securities and Exchange Board of India (Sebi) was alerted by a whistleblower that certain broker members who had availed co-location facilities at NSE gained unfair advantage by accessing market information ahead of others. This, the anonymous letter-writer had alleged, happened from early 2011 to 2014 with the connivance of the NSE officials.

In high-speed algorithmic trades, a connection to the right server and faster execution of trades can help a trader beat others and make a killing. Co-location (or Colo) enables a broker to rent space to house its server at the exchange premises and therefore closer to the exchange server. The market regulator, which has appointed an enquiry officer to investigate the matter, sent the notices a few days ago, two persons familiar with the development told ET.





HOLDING PEOPLE ACCOUNTABLE
Among other officials who received show-cause notices are Ravi Varanasi (chief of business development), Suprabhat Lala (chief of regulation), ex-CEO Chitra Ramkrishna, former technology heads — Ravi Apte, and Umesh Umesh Jain, and former chief operating officer Subramanian Anand.

Sebi has also sent notices to some officials in the technology and business divisions to get their reactions on the Colo allegations. The NSE management and the officials in question are taking legal advice to prepare their response for the market regulator. “As the matter is under discussion between NSE and the regulator, you will appreciate that we will not be able to comment on your queries,” said the exchange spokesperson, responding to ET’s text message.

Till March 2013, Ravi Narain, one of the founder-members, was the CEO of the exchange. Narain, who stepped down a year before his term ended, continued to be a director on the NSE board. He was succeeded by Chitra Ramkrishna during whose term NSE switched over to a technology that was far less prone to manipulation. She resigned abruptly as CEO in December 2016, almost 15 months before the end of her term. IDFC chief Vikram Limaye has been named the new CEO.

The proposed appointment is awaiting Sebi approval. “The investigation into the NSE matter has gathered pace after the appointment of the new Sebi chairman. My understanding is that the matter would soon reach a closure and some of the people would be held accountable. That would be positive for the exchange which can then focus on business and explore new opportunities. For instance, it is scheduled to start operations in GIFT City international financial services centre next week,” said a senior person in the industry.

It is perceived that once the shadow of Colo scandal is behind, NSE can also pursue its listing plan which has been hanging fire for months. The show-cause notices from Sebi followed scrutiny — including a forensic review by Deloitte Touche Tohmatsu — of co-location facility that NSE provides to member brokers. While the report does not point out culpability of senior exchange officials, it makes a mention of an oral statement by a former midlevel officer who told the Deloitte’s forensic team that “oral instructions for server allocations and other changes” were often received from “seniors”.