As investigation into the NSE colocation (colo) case continues, the brokers who are alleged to have gained unfair access to the exchange’s colo facilities are now under the scanner. A team from the market regulator, SEBI, is reported to have visited the office of OPG Securities, the firm mentioned in the whistleblower’s letter that began this saga in 2015.
The NSE also issued a showcause notice to OPG Securities a few days back. A number of other brokerages, who tried to game the NSE’s colo system, are also said to be under the scanner.
It is obvious that SEBI is trying to make amends for its initial negligence and bring the matter to a closure. The Singapore-based hedge fund employee who had initially blown the whistle on this matter in 2015 had written to both SEBI as well as Moneylife. But it was only after media took up the matter strongly that the regulator began a serious investigation into this. The letter has said certain brokers logged in to the NSE’s colocation facilities through servers that were switched on first. This allowed them to gain access to tick-by-tick (TBT) data, a few milliseconds before others in the colocation facilities. This advantage allowed the algo programmes run by these traders to profit since they could see the information and execute trade before everyone else.
The letter had specifically alluded to Sanjay Gupta, the CEO of OPG Securities, as the person who had colluded with certain officers at the NSE to find out the loop-hole in the colocation facility first. Once others in the colo facility started following his lead, logging in to servers that switched on first, he began logging in through the back-up server, which gave him better access.
For the non-geeky reader, colocation facilities allow some brokers and institutional traders to buy rack space close to the exchange servers. The proximity improves the latency (speed of execution of the order). Its only a couple of hundred large and wealthy traders who use these facilities. The episode of unfair access took place between 2012 and 2014; the exchange has since changed its system at the colo facility after it got multiple complaints from other users of these facilities about some brokers gaming the system.
The NSE officials are of the view that the brokers who logged in early have not really profited from it. The regulator is perhaps now trying to establish the quantum of gains the brokers could have made through this early logging in. If it can be established that they profited, the penalty on the exchange could be decided.
If it is not proved that the brokers who exploited the system profited from logging early, then SEBI might have to stop short with ensuring that similar lapses do not take place in the future.