Even as the National Stock Exchange (NSE) is trying to go for a consent order in its algo or High Frequency Trading (HFT) or algorithmic (algo) scam to “put the past behind” and launch its initial public offering (IPO), market regulator Securities and Exchange Board of India (SEBI) has issued a second set of show cause notices on 3 July 2018 in its probe into the algo scam. Starting 2010, certain brokers namely Way2Wealth and GKN Securities used NSE’s co-location facility to get early access to its algorithmic trading systems, gaining an unfair advantage until NSE changed its systems in 2014 to prevent misuse.
The second show cause notices (SCNs) alleges that NSE has undergone practices of denial of services to certain stockbrokers resulting in discrimination and non-adherence to principle of fairness and equal opportunity by allowing Way2Wealth (W2W) and GKN Securities to terminate the connections directly in the rack placed inside the Exchange’s co-location facility. This, the SCN says is in complete contradiction to normal practice followed by NSE.
W2W and GKN were allowed to establish P2P connectivity through service provider Sampark, while many stock brokers who desired to lay P2P connectivity through providers other than the four mentioned in the NSE circular on 31 August 2009, were denied permission by NSE staff. It has also been alleged that NSE lacked a clear documented policy for due diligence of service providers by checking their license while allowing P2P connectivity.
To make matters worse, NSE allowed W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have the requisite Department of Telecommunications (DoT) license. Furthermore, in the process of providing connectivity, a site inspection was conducted for other stockbrokers such as Millennium, GRD and SMC while the same procedure was not followed for W2W and GKN.
The notice states “…at the relevant period of time Mr Umesh Jain was CTO of NSE and in this capacity he was responsible for inter-alia, network operation, application operation and hardware and storage management. He was also the supervisor of Mr Deviprasad Singh (Head of colo support, NSE) who had granted permission to Sampark to place infrastructure in NSE, without verifying their license. It was Mr Singh’s responsibility to monitor the cabling and ensure fair and equitable access to all its trading members. As a supervisor of colo support, it was Mr Jain’s duty and responsibility to incorporate checks and balances so that, incidents like cabling to Sampark through W2W rack could have been detected early. The show cause notice claims that he failed to establish procedures to prevent such lapses.”
The notice further names Chitra Ramakrishna, acting MD and CEO of NSE at the time, as it was her duty and responsibility to create investor confidence in the integrity of the market and also to ensure that the stock exchange abides by all the provisions of SEBI. Subramanian Anand, Group Operating Officer (GOO) & Advisor to MD and Ravi Varanasi, Head of business development function have also been asked to reply to the SCN.
The conduct of NSE and W2W of continuing usage of the Sampark line even after knowing that they did not have the requisite licenses for providing such connectivity, points towards collusion amongst them for the express benefit of W2W. Accordingly, SEBI has named W2W’s CEO R Shashibhushan, and Directors CK Nithyanand and BG Srinath in the SCN. Similarly, GKN was also a direct beneficiary of preferential treatment as they too continued to avail the services of Sampark until September 10, 2015. Thus, SEBI has named partners of GKN Securities Sonali Gupta, Om Prakash Gupta and Rahul Gupta in the notice as well.
Finally, Sampark acted in collusion with W2W and NSE to lay the cabling in such a way that W2W had lower latency compared to other trading members connected to the line. Accordingly, Prashanth D’souza, CEO of Sampark has also been issued this notice as it was his responsibility to not indulge in manipulative, fraudulent or deceptive transactions or scheme and abide by all the provisions of law while dealing in its business.
SEBI has requested the noticees’ to provide a reply to the show cause notice along with any supporting documents within 21 days of the receipt of the notice. Failure to do so, allows SEBI to assume that noticees have no reply to submit and accordingly proceed to take action in accordance with the law and the SEBI Act.