Co-location case: Sebi rejects NSE’s settlement plea

Instead it is expected to proceed with the charges and issue a regulatory order soon. (Image/Reuters)

The Securities and Exchange Board of India (Sebi) has rejected a settlement application by the National Stock Exchange (NSE) in the co-location case. According to a report by moneycontrol, NSE had filed under the consent mechanism of the market regulator. The mechanism allows market participants to settle any alleged security market violation by paying a fee and without admitting or denying guilt.

However, in this case, the market regulator has denied the exchange any relief under the mechanism. Instead it is expected to proceed with the charges and issue a regulatory order soon.

The case pertains to alleged collusion between NSE officials and OPG Securities –one of the brokers accused of getting preferential access to the exchange’s servers thereby providing them an undue advantage over other traders.

The report said that Sebi had also provided the NSE a chance of personal hearing sometime last week.

In 2019, Sebi had passed a series of orders in the co-location matter in which one of the key accusations was alleged collusion between NSE employees and OPG Securities. This order was challenged by both NSE and OPG Securities in the Securities Appellate Tribunal (SAT). Last January, SAT remitted the matter back to Sebi asking the regulator to consider the charge afresh.

“SAT had observed Sebi’s 2019 order did not have sufficient evidence to link NSE and OPG employees. Sebi however is taking a view that there is enough evidence to link both,” the report said citing a source.

The main question in the case is that whether NSE employees were working in tandem with OPG or was it a general case of negligence to take decisive action, said one of the sources cited the story. Connivance charge needs stronger evidence like documents showing flow of money between parties or material indication tampering with the system, they said.

The allegation against the NSE is that it failed to take action against the broker despite being aware of the preferential access, and that it had failed to put in place checks and balances that would have ensured transparent access to participants.

According to reports, OPG Securities managed to log in to Tick by Tick Data Feed(TBT) ahead of others there by getting an advantage over the rest of the market. Although NSE was aware of OPG getting such preferential access, did not take any action against the broker. Also, NSE did not put in place the so-called load balancers which would have ensured more transparent access to participants and would have reduced any special advantage OPG had over others.

In 2009, the NSE had launched the co-location facility to allow traders and brokers to establish IT servers within its premises for a fee. However, in 2015, a whistleblower sent a letter to the regulator alleging unfair access to a few high-frequency traders and brokers. Consequently, the regulator initiated a probe.

This led to orders in 2019 against former MDs and CEOs Ravi Narain and Ramakrishna, prohibiting them from the securities markets and directing them to disgorge 25% of salaries earned during the said period.

OPG Securities is a Delhi-based brokerage promoted by Sanjay Gupta. The regulator had imposed a fine of Rs 5 crore in 2019 for its role in the co-location scam, besides barring its promoters from the capital markets. In 2022, the CBI had arrested Sanjay Gupta in relation to the scam.

Sebi has passed multiple orders with respect to the scam. Over the last year, SAT has overturned several orders of Sebi, including the Rs 625-crore disgorgement order on the NSE.