SEBI was contacted for a comment and has not replied till now…
The Securities Exchange Board of India (SEBI) appears to be getting ready to rule on the National Stock Exchange (NSE) co-location scam. From reading this Hindu Business Line article, I understand that penalties are going to be handed to the gang of 14 that formed the core of management in NSE during the time of the scam[1]. A penalty on those involved is a cruel joke on all the investors of India. Does SEBI even understand the magnitude of the crime committed by NSE?
The harm High-Frequency Trading (this comes because of co-location) can inflict on the investor is well documented in Michael Lewis’s Flash Boys[2]. A momentous decision like this, for the SEBI to allow it at the NSE should have been taken after much deliberation, talking to the industry experts including a public hearing period before allowing it. Instead, what happened was that the NSE quietly started tick-by-tick (TBT) High Frequency or Algo trading (HFT) and co-location services in January 2010, putting it out on their website (since modified by NSE) but click here for what was shown[3]. Before they started this, there should have been a notification from SEBI, approving it for all exchanges. But nothing of that sort happened. The Chairman of SEBI at that time was C B Bhave and the NSE Managing Director was Ravi Narain. So strictly speaking, all trades involving co-location are illegal and must be reversed. Will SEBI criticize itself for not stopping NSE? Remember the appointment of Bhave as Chairman was clouded in controversy, over his role in NSDL[4].
A slap on the wrist is counter to the amount of malfeasance that has come out in this gory episode. First, a list of scams alleged:
The accounting firms appointed by NSE to investigate this have a conflict of interest issue, as mentioned by another whistleblower[7]. This whistleblower claimed that Deloitte, Ernst and Young (EY) and Indian School of Business (ISB), should not be doing the forensic audits as all of them had rock solid conflicts of interests.
A light penalty on the likes of Ravi Narayan or Chitra Ramakrishna would be a gross travesty of justice. That they did this and are now pleading ignorance of what their technical team was up to is shocking. When you are the CEO, the buck stops with you – period. That is why you are getting paid big bucks, in line with Wall Street salaries. And the proceeds of crime in the co-location scam are huge.
A back of the envelope calculation on how these amounts were arrived – during the period 2010-14, on one hand, the whole market was incurring losses while on the other hand, a handful of HFT operators made illegal gains of at least Rs. 50,000-60,000 crores (cr) ($7.7 B – $11.5 B) in the melee. They were making every day gains of about Rs. 50-100 cr and considering 20 working days in a month, then the minimum monthly gain stands at Rs 1000 cr and it adds up over a five-year period (see Figure 2).
References:
[1] SEBI’s final order in the NSE co-location scam expected soon – Mar 28, 2019, Hindu Business Line
[2] Flash Boys: A Wall Street Revolt – Amazon.com
[3] NSE started Tick-by-Tick Service Illegally in 2010 when SEBI looked the other way – Aug 23, 2018, MoneyLife.in
[4] Meet the SEBI chief C B Bhave – Apr 28, 2009, Rediff Business
[5] Anatomy of a Crime P3 – How did they loot? Oct 2, 2017, PGurus.com
[6] Anatomy of a Crime P4 – Who benefited from the HFT scam? Oct 4, 2017, PGurus.com
[7] Is NSE becoming its own Judge, Jury and Acquitter? Nov 19, 2017, PGurus.com
US reacts to PM Modi's 'ghar mein ghus kar marenge....' statement on terrorism The United…
Hemant Soren's party leader Antu Tirkey, 3 others arrested by ED in Jharkhand land scam…
BJP-led NDA to gain 362 seats in Lok Sabha polls, predicts opinion poll With a…
Rajasthan Assembly switches from the English calendar to the Hindu calendar The Rajasthan Assembly has…
Service sector will create maximum jobs: Report According to the ‘India Employment Outlook 2030’ report…
US recognizes India's role as largest democracy and vital partner India is the world's largest…
This website uses cookies.
View Comments
Sir
I appreciate your anxiety in punishing the evil doers in the co-location scam. Do you think that the present government and Sebi are not aware of the misdeeds ? No they are fully aware of it. But any exemplary punishment handed over to culprits by SeBi will lead to huge melt down in the market leading to crash and panic among investors. Hence wiser counsels should always prevail though in the end Dharma is violated.