National Stock Exchange’s Co-location Case

Recently, watchdog SEBI’s chairman called the NSE co-location case as “serious”. So what is the NSE co-location case all about? Below is the explanation of the same:

National Stock Exchange Image

Source: LiveMint

What is co-location?

Co-location refers to the facility where brokerages can house their servers inside the exchange to get better speed for trade execution. Since, the broker’s server is placed closed to that of exchange, the latency is reduced.

NSE started offering this facility in February 2010.

What is the case?

In 2015, SEBI received three complaints against the exchange alleging that certain brokers with co-location servers were getting access to market data before the other who also had such facilities within NSE. The complaint also alleged that the employees of NSE were also involved in the irregularities.

How did the SEBI and NSE reacted to the complaints?

Following complaints about co-location facility of the exchange, a SEBI-appointed technical advisory committee (TAC) had initiated an examination and found instances of breach of fair access rules by the exchange.

In September 2016, after the findings made by SEBI’s advisory committee, the regulator asked the NSE board to initiate an independent examination of its systems and process. The exchange’s board then appointed Deloitte India to conduct a forensic investigation.

Deloitte in its report highlighted that there were some lapses related to procedures and processes and it could have been that an NSE employee was also involved. It also stated that the technology used by the NSE earlier to offer co-location service was prone to manipulation in terms of lags in information dissemination.

Based on the Deloitte report, NSE decided to look at every single aspect of co-location to ensure everything is transparent and nothing is left to unstated practices.

What is the current status?

Currently, the NSE is strengthening its policies and procedures related to co-location facilities. SEBI, at the same time, is looking into the allegations of selective brokerages getting preferential access at the exchange.

The National Stock Exchange (NSE) may have to refile papers for its ₹10,000- crore IPO (Initial Public Offering) after addressing issues related to alleged preferential access given to some brokers, watchdog SEBI’s Chairman Ajay Tyagi said, terming the co-location case as “a serious matter”. The exchange had, in December, filed its draft papers with SEBI for a Rs. 10,000 IPO and was awaiting SEBI’s approval.

 

References:

http://www.thehindu.com/todays-paper/tp-business/SEBI-stung-NSE-to-reset-co-location-code/article17316206.ece

http://www.thehindu.com/business/Industry/nse-co-location-case-serious-says-sebi/article19205038.ece

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