Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs3 lakh on Yug Securities for flouting norms related to the National Stock Exchange (NSE)'s co-location (Col) facility. SEBI had received multiple complaints against the broker, pertaining to allegations of malpractices with respect to the Colo facility provided by NSE.
SEBI had taken up the matter for investigation, in the wake of allegations of preferential access to tick-by-tick data feed given by NSE to certain trading members.
Yug Securities was one of the trading members identified for comprehensive investigation (including forensic audit) for primary and secondary server connects. Deloitte Touche Tohmatsu India LLP was entrusted withthe forensic audit of the Yug Securities. Deloitte submitted the final report to SEBI in September 2019.
Deloitte, in its report, had stated that NSE Colo Support vide email dated 30 August 2012 had provided the NSE Colo guidelines to Yug Securities, ‘NSE Colocation Guideline ver_1.2’. The said guidelines inter alia indicated that “Members should always check the secondary TBT parameters are working fine with their application and in case of non-availability of data from TBT primary source they can move to secondary source.” The aforesaid restriction on secondary server came into effect from April 2012. However, Yug Securities falsely claimed that they have not received any general/ specific guidelines/ communications issued by NSE with respect to connecting to the secondary / fallback server.
SEBI’s investigations revealed that the company logged into secondary server in cash market segment during 2013-2014. According to NSE's Colo guidelines, secondary source for TBT data is to be used in the event of non-availability of TBT primary source and trading members should not routinely connect to the secondary server. vTherefore, it is not considered to be normal when brokers repeatedly connect to secondary server without justifiable cause.
Yug Securities was seen to have connected frequently to the secondary server as it connected on 58 trading days out of 250 trading days (23.20%) during the calendar year 2013 and on 205 trading days out of 207 trading days (99.03%) during the calendar year 2014. Further, on analysis of the data with regard to connection to the primary servers, it was observed that on the aforementioned 263 days, Yug Securities had only connected to the secondary server, i.e., the Noticee had not connected to the primary server on any of those 263 days where it connected to the secondary server.
Further, as per the available records, NSE advised the stockbroker not to connect to the secondary server. However, the broker continued to connect to the secondary server, SEBI added.
Yug Securities connected frequently to the secondary server which was in violation of the NSE co-location guidelines, thereby also failing to exercise due skill, care and diligence in conducting its trading operations, SEBI said. Through such acts, Yug Securities flouted the provisions of NSE's by-laws and code of conduct specified under Stock Broker regulations.
SEBI initiated adjudication proceedings under Sections 15HA of the SEBI Act and Section 15HB of the SEBI Act read with Regulations 26(xvi) and 26(xx) of Stock Broker Regulations and Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003 (PFUTP Regulations) against Yug Securities. A show-cause notice (SCN) was served to the Noticee in January 2022. Yug Securities contended that there is an inordinate delay in initiation of proceedings by SEBI.
In its order dated 12 April 2022, SEBI noted that Yug Securities connected to the secondary server on 263 out of 457 trading days, i.e., 57.55% of the trading days without having sufficient reasons to connect to secondary server. Thus, they connected frequently to the secondary server in violation of NSE's Colo guidelines, thereby also failing to exercise due skill, care and diligence in conducting its trading operations.
Moneylife has been covering the NSE Colo scam since 2015 and the details of the Colo scam have been documented in the book
Absolute Power by the editors of
Moneylife Sucheta Dalal and Debashis Basu. The book was released in June 2021.
