explained | Has NSE given preference to certain brokers?

the story So Far: The issue of co-location has once again come into the limelight after the market regulator’s latest order granting approval to former National Stock Exchange (NSE) MD and CEO Chitra Ramakrishna on the decisions taken by her. Under the alleged influence of a mysterious ‘yogi’, In its order of February 11, The Securities and Exchange Board of India (SEBI) had observed That the fact of sharing of confidential internal NSE information by Ms. Ramakrishna with an unidentified person came to light during the regulatory investigation into the co-location case. SEBI had passed its first order in April 2019 after its judgment in the co-location case, when it imposed a fine of ₹625 crore on NSE. The regulator had then banned OPG Securities and its three directors from the securities market for five years and imposed a fine of around ₹15 crore.

What is co-location?

In 2009, NSE started offering co-location services to the members of the exchange. Co-location allows a member to set up his own server in a specially designated data center within the exchange premises of NSE for a fixed price. And even though this data center is located in a separate wing from the exchange’s trading systems, the relative proximity allows members to access the entirety of buy and sell orders sent to the exchange by market participants, or tick-by-tick data. , the beginning of a few microseconds or nanoseconds. However, these brokers will technically only be able to perform automated trading using algorithms because the speed and volume of incoming data is too high to be processed manually. These so-called ‘high-frequency’ traders often thoroughly analyze the data to refine their trading strategies, which is then incorporated into algorithms that execute automated trades.

In Focus Podcast | The story of Chitra Ramakrishna and the ‘Faceless Yogi’

On the other hand, other investors, including retail participants, see a snapshot of the market information that is disseminated to them by NSE from time to time on their broker platform.

Is there anything illegal about co-location?

Co-location per se is not illegal. Stock exchanges around the world allow this practice to flourish as a paid service. SEBI, in fact, allowed exchanges to offer co-location in 2008. Hence, the NSE co-location case has something else to do.

In 2015, a whistleblower alleged that some members of the exchange were able to manipulate the co-location services of NSE with the support of some officials of NSE’s IT department. It should be noted that initially NSE transmitted order data to users of its co-location service through TCP-IP or Internet Protocol technology, as a technology that preferred first-comers. It is said that under this age-old technique the members who first logged into the NSE’s server and the least loaded server were able to access the data coming from the exchange before the others. Some members have even tried to tap into NSE’s backup servers to bypass the competition and are said to have employed various other strategies aimed at making other members stand out from the crowd.

Read also | Email between former NSE MD Chitra Ramakrishna and ‘Yogi’, a coded puzzle for investigators

However, SEBI is yet to establish whether NSE is complicit in such manipulation. It has penalized the exchange for simply failing to prevent misuse of its co-location service. NSE also made changes in the way data is transmitted to users of its co-location services. In 2014, it introduced the multicast protocol transmission, whereby data from exchanges was multicast and members subscribed to a specified address to receive tick-by-tick data. This ensures that the streamed data is received by all the members availing the co-location facility. Exchange on a service at the specified address.

Do co-location services give some people an unfair advantage?

The issue of co-location has led many to question the fairness of today’s market infrastructure. Proponents of co-location services argue that it allows for quick dissemination of market data and improves market liquidity. They also state that the service is available to anyone who is willing to pay a reasonable fee. It should also be noted that other connectivity options for accessing NSE trading data including V-SAT and Lease Line are also subject to fee.

editorial | Remiss regulator: On NSE’s mess and protection of small investors

However, critics of co-location believe that it gives preferential access to some market participants at the expense of others. This, they argue, goes against the fundamental purpose of exchanges, which is to ensure that securities are sold to the highest bidders among all market participants.

Comment | L Affair NSE: Is Corporate Governance an Illusion?

In short, he argues that market efficiency is more important than speed. Some critics have also argued that exchanges should regulate the transmission speed of order data in such a way that all market participants receive the data at the same time.

• The issue of co-location has once again come into the limelight after the market regulator’s latest order on the decisions taken by her under a mysterious influence to Chitra Ramakrishna, former MD and CEO of the National Stock Exchange (NSE). Yogi’.

• Co-location per se is not illegal. Stock exchanges around the world allow this practice to flourish as a paid service.

• However, critics of co-location believe that it gives preferential access to some market participants at the expense of others.