iasparliament Logo
May 07, 2019
10 months

Why in news?

Securities and Exchange Board of India (SEBI) ordered the National Stock Exchange of India (NSE) to pay a fine of about Rs.1,000 crore over certain irregularities.

What is the scam all about?

  • Co-location services allow brokers to operate closer to their servers upon payment of additional fees.
  • It helps brokers secure advantage over others due to proximity to exchange servers as data transmission takes less time.
  • A whistleblower in 2014-15 complained to the SEBI, on brokers abusing the colocation facility in collusion with few top NSE officials.
  • NSE was then using the so-called tick-by-tick (TBT) server protocol to relay data to members.
  • Normal data protocols send data to all users connected on the network at the same time.
  • But TBT transmits in the sequence of orders received.
  • In other words, the user who gets the access to the system first would receive data earlier than the rest.
  • [Omnesys Technologies is the company that provided this technology to NSE.]
  • A select set of brokers in collusion with NSE officials and Omnesys Technologies got the first access to the NSE’s servers giving them an advantage.

What is SEBI's order now?

  • SEBI has found OPG Securities, GKN Securities and Way2Wealth along with internet service provider Sampark Infotainment guilty of unfair trading practices.
  • These brokerages continuously got first access to NSE servers.
  • OPG got access to NSE’s backup servers which were maintained by it to prevent technical glitches on the main server from impacting operations.
  • It thus, in effect, gave them first access which helped them in executing orders fast.
  • NSE also overlooked the fact that Sampark Infotainment did not have a valid Department of Telecom licence to provide dark fibre connectivity to some brokers.
  • [Connection through dark fiber ensures more bandwidth and less distortion of data; faster and efficient access to exchange’s servers.]
  • Along with brokers, SEBI has also charged several NSE top officials for colluding with brokers and not following appropriate protocols.
  • Two former NSE chiefs have been ordered to pay back a part of their past salaries as punishment.
  • Further, NSE has been slapped with a fine of Rs 687 crore plus interest.
  • Also, NSE cannot access capital markets for six months, and its Initial Public Offering (IPO) will be delayed till the year-end.

Did NSE break the rules?

  • It was NSE's supervisory negligence that led to some of its broker-clients gaining preferential access to certain market data.
  • But there was lack of sufficient evidence to establish fraudulent conduct by NSE.
  • It's because it has not yet been proven decisively that the firms with preferential access managed to profit from such data.
  • Nevertheless, clearly, NSE failed to ensure that the exchange was fully compliant with the norms governing securities exchanges.
  • This violates SEBI's principle of not allowing information asymmetry among the participants, and thus affects market fairness.

Why is SEBI's move significant?           

  • Millions of retail investors believe that stock exchanges provide a level playing field to all the players.
  • Given this, the financial penalty on NSE is a welcome regulatory action.
  • It ensures that small investors retain confidence in the fairness and soundness of key institutions that enable a market economy.


Source: Economic Times, The Hindu

Quick Fact

National Stock Exchange of India

  • The National Stock Exchange of India Ltd. (NSE) is the leading stock exchange in India.
  • It is the second largest in the world by nos. of trades in equity shares from January to June 2018.
  • NSE has a fully-integrated business model comprising exchange listings, trading services, clearing and settlement services, indices, market data feeds, technology solutions and financial education offerings.
  • It also oversees compliance by trading and clearing members and listed companies with the rules and regulations of the exchange.
Login or Register to Post Comments
There are no reviews yet. Be the first one to review.
UPSC Prelims 2020