India’s largest stock exchange National Stock Exchange (NSE) has to park the revenues it garnered from its co-location business since September 1, 2016, in a separate bank account until SEBI gives its final ruling on allegations of giving preferential access to certain stock brokers.

While the NSE has denied these allegations, an independent agency had found that the bourse’s system was prone to manipulation. According to disclosures made by the bourse in its draft offer document for initial public offering (IPO), revenue from the NSE’s co-location facility was ₹451.2 crore (26.1 per cent of total revenue) in FY15, ₹553.96 crore in FY16 (29.7 per cent of total revenue) and ₹302.91 crore in the first half of FY17 (29.3 per cent of total revenue).

Pending receipt of final findings by SEBI, the NSE would not have access to this revenue.

The reports by IIT Bombay and the independent agency (Deloitte) concluded that NSE’s architecture for dissemination of tick by tick (TBT) was prone to manipulation and market abuse.

A tick refers to a minimum price movement in a stock/currency or any other asset class. For NSE equities the tick size is five paise. Exchanges provide tick by tick data to algorthmic/high frequency traders using servers located next to the exchange servers. This is called co-location facility.

SEBI observations

SEBI had earlier said that the NSE had violated its own policies by permitting entities that are not internet service provider to lay fibre optic cables at its co-location facility for various stock brokers and also flagged the possibility of collusion between the exchange’s officials and stock brokers.

Disputing the findings of the interim report by IIT Bombay, the NSE said trading members logging in early would not necessarily receive data ahead of other trading members or any material advantage and consistent early login per se would not amount to market abuse.

It said no limit had been placed on the number of IP connections available to any trading member (broker), and accordingly disputed the observation that one member was crowding out others.

Independent agency

However, the independent agency’s analysis highlighted trends for certain periods where a few stock brokers appear to be the first to connect to specific servers significantly more often than others. Ticks were disseminated faster to members connected to less-crowded servers, thereby giving an advantage to such stock brokers.

The agency’s analysis indicated that one particular stock broker almost consistently connected first to the fall-back or secondary server during the period from December 10, 2012, to May 30, 2014, and was very often also the second stock broker to connect during this period, adding that continuous access to the fall-back or secondary server may not have been possible without the knowledge of certain NSE employees.

The NSE has transferred ₹6.53 crore of revenue generated from the co-location facility to a separate account as directed by SEBI.

In addition, ₹145.52 crore of revenue from transaction charges was also deposited.

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