Mumbai Several officials of the Securities and Exchange Board of India (SEBI) are being questioned by the Central Bureau of Investigation (CBI) in connection with the lapse in regulatory oversight of the National Stock Exchange of India (NSE), two people with direct knowledge of the matter he said .
The first of the two people mentioned above, requesting anonymity, said, “Some mid-level SEBI officers are currently in Delhi and are involved in various regulatory oversight measures taken by the regulator on co-location services of NSE by CBI. Inquiries are being made.”
“Despite annual inspections and need-based inspections, SEBI did not take cognizance of co-location services being run in NSE without SOP (Standard Operating Procedure). Further, it appears that NSE never took permission from SEBI before starting co-location services in 2009-10.”
Email queries of the spokespersons of SEBI and CBI spokesperson had not been replied to till press time.
A co-location facility is a service provided by exchanges where brokers and trading members keep their servers on the exchange premises to get faster access to market data and trading. While co-location of servers is a globally accepted practice, it is often criticized for being unfair to traders who do not have access.
In case of NSE, the service was started in 2009-10 without any standard procedure, leaving the possibility of system manipulation.
For example, in its investigation and public orders, SEBI found that NSE did not have any procedure whereby members could access secondary servers with less congestion.
One trader accessing the NSE system through the secondary server was almost like a motorist driving on an empty highway, while the rest of the traders were stuck in traffic.
NSE’s co-location facility has 1,200 racks where brokers can set up their servers. Since it is a local area network (LAN), order placement is faster than brokers whose servers are located outside the exchange premises. Average latency stands at 1,744 nanoseconds. These rack spaces are occupied by over 1,400 brokers trading on the NSE and 200-odd brokers out of the trading members.
It is one of the biggest revenue-generators for the exchange, and each rack is sold 12 lakh annually. In the first nine months of FY 2022, NSE collected 306 crore in co-location charges. Brokers can also buy a half rack and a quarter rack. From September 2016 to March 2021, the income earned from co-location was 6,085 crore.
The first person said, “NSE co-location service was started in 2009-10 and without explicit permission of SEBI and a circular to comply with the guidelines for co-location was issued in May 2015 itself.”
Meaning CBI’s inquiry on regulatory oversight on NSE Colocation Service may also interrogate former top SEBI officials.
CB Bhave, who was serving as chairman when NSE started colocation service, left the office in 2011.
The circular on guidelines for colocation service was issued when U.K. Sinha was serving as the chairman. To ensure this, the whistleblower complaint which led to the investigation in the colocation matter was sent to SEBI on 14 January 2015.
Email queries to CB Bhave and UK Sinha did not go unanswered.
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