The technical advisory committee (TAC) appointed by the Securities & Exchange Board of India (SEBI) has nailed wrongdoing in the National Stock Exchange, which were mentioned by Ernst & Young (E&Y) in its revised report. The Committee also rapped E&Y for the forensic firm’s failure to draw conclusions from its obvious findings.
At its meeting held on 14 June 2018, TAC also pointed out how, in 2014, some brokers were consistently allowed to log into co-location (colo) servers ahead of others, following a breakdown in systems and lack of processes at the NSE.
Here are the minutes of the meeting, which adopted the contents of the E&Y subject to minor editing:
1. To examine whether the architecture of the NSE with respect to dissemination of tick by tick (TBT) through TCP/IP was prone to manipulation and market abuse.
The Committee noted that the architecture of the NSE with respect to dissemination of tick by tick through TCP/IP was prone to market abuse.
2. To assess whether some members were given preferential access to back-up servers and whether this permitted undue advantage to such members
The Committee noted that E&Y has observed that the NSE did not have defined policies and procedures around secondary server access and the NSE did not have a documented policy or procedure around reprimanding members connecting to secondary servers. The Committee further noted that the NSE performed limited monitoring of connections by members connecting to secondary servers in 2012 and reprimanded select members for making connections to secondary servers.
However, not all members who accessed secondary servers were reprimanded by the NSE. In fact, some of the members were reprimanded multiple times with a warning that they are committing an offence and their access will be stopped while others were never warned. In view of the above observations, the committee concluded that some trading members were given preferential access to back-up service at the NSE.
Committee further noted that the trading members having an access to back-up servers potentially had an advantage over other trading members since the load on back-up service was less than the primary servers.
3. To examine whether it was possible for a single member to have multiple logins to a single dissemination server through multiple IPs (Internet Protocol) assigned to it to gains substantial advantage by logging in first and even by logging in second.
The Committee noted that it was possible that trading members had multiple logins to a single dissemination server through multiple IPs. The Committee further noted that while getting multiple IPs was a paid service that was available to all the trading members, the manner in which this could be used to ‘crowd out’ other trading members could result in unfair advantage.
4. To examine whether the practice of allocating static IPs to members for accessing the dissemination servers resulted in enabling a few members to log on to the fastest dissemination servers.
The Committee noted that IPs were not allocated in a transparent manner at the NSE. The Committee further noted that as the IPs were manually allocated and given the fact that the service when not equally loaded and configured, selective manual distribution / allocation of IPs could present potential access advantage to some trading members over other trading members.
The Committee also noted that relatively simple technologies such as load balancer and randomiser were available to the address the issue of manual allocation of IPs. However, these same were not deployed by the NSE.
5. To identify if there was any practice of any randomisation and whether its presence/ absence resulted in any advantage to any trading member.
The Committee agreed to the conclusion of E&Y that randomisation was not implemented in transmission control protocol/ internet protocol (TCP/IP) tick-by-tick (TBT) architecture and in the absence of a randomiser, dissemination on each port of a TBT of a TBT server was sequential based on login time of a member. Therefore, in the Committee’s opinion such sequential dissemination could result in a potential advantage to preferred trading members.
6 .To determine whether any stock brokers were given any form of preferential treatment (for example, sending select information about back-up servers being in active mode to select few members).
The Committee noted that from the email evidences and observations in E&Y report regarding reprimanding selected members for making connections to secondary server and not all, it can be concluded that preferential treatment was given to a few brokers in terms of selective information.