Sebi’s investigation into role of brokers in advanced stage

The market regulator’s expanded probe into the co-location scandal at the National Stock Exchange (NSE) covering brokers has reached an advanced stage, two people familiar with the matter said. In 2018, the Securities and Exchange Board of India (Sebi) had widened the scope of its investigation that was limited to gaps in NSE’s systems and its failure to give fair access to the entire market.

“The total number of brokers the regulator is examining is over 50. These are those brokers whose name has appeared in the forensic audit reports. Sebi is looking at brokers who are even remotely mentioned in these reports as the regulator would not like to miss out anyone,” one of the two people cited above said.

The regulator had assigned the task of quantifying the illegal gains to ISB Hyderabad towards the end of 2018, the second person said. “The regulator was looking at all the brokers who may have either made gains or avoided losses due to the unfair advantage. The regulator had given the mandate to ISB Hyderabad to look into the data of these 50-odd brokers for a period of 2009-2016. Considering the huge dataset, the report is yet to be finalized, but is understood to be in advanced stages,” this person added.

This data will be crucial in pinpointing the culprits and uncovering the magnitude of illegal gains made by select brokers.

The case pertains to some broking firms getting preferential access to NSE’s high-speed algorithmic trading platform through its co-location service. Due to this advantage, they were able to make undue gains over the market or avoid losses.

In a 30 April 2019 order, Sebi had asked NSE to deposit ₹1,000 crore in an investor protection fund.

The regulator had commissioned three forensic audits in this case - by EY India on NSE’s cash and currency segments; by ISB to determine illegal gains made by the brokers; and by Deloitte Touche Tohmatsu India Llp.

On 11 January 2019, Mint reported, citing forensic audit reports, that as many as 62 brokers -- some of them top Indian and foreign firms -- may have enjoyed unfair advantage due to preferential access.

These showed that the average turnover and profits of these 62 brokers were higher during 2010-14, when they were supposed to have got unfair access and went down when NSE strengthened its infrastructure. To be sure, the profits could have also increased as a function of their trading decisions and calls.

In cases of some brokers, the reduction in profits was marginal and in some cases, the intra-day profits reduced substantially. At some other brokers, average overnight losses increased substantially, the forensic audit reports showed.

ISB Hyderabad in its earlier report had pointed out that Delhi-based broking firm OPG Securities had made gains of ₹25 crore due to this unfair advantage, according to a Sebi show cause notice sent in June 2018 which was reviewed by Mint.

“Since ISB was familiar with the case and NSE systems, Sebi gave the expanded mandate to them,” said the second official.

In addition, some of the past and present officials of NSE got calls from the Central Bureau of Investigation (CBI) on Monday and were subject to specific questions, said a third person. He too declined to be named. “The questions were related to NSE infrastructure, on whether the NSE officials were aware of the gaps in NSE systems for disseminating market information, and when were those defects corrected,” said the third person.