NSE Gets Second Show-Cause Notice From SEBI In Co-Location Probe

The market regulator issued a second show-cause notice to the National Stock Exchange of India Ltd. in its probe into the alleged preferential access given to some high-frequency traders, two people aware of the development told BloombergQuint requesting anonymity.

The notice follows forensic audit and internal investigation into NSE's co-location service by the Securities and Exchange Board of India, its senior executives and the brokers involved. It focuses on the role of the exchange, its officials and brokers in two issues: tick-by-tick trade and dark fibre, said one of the people quoted earlier.

In its second show-cause notice, SEBI has alleged violation of SEBI Act, Securities Contracts (Regulation) Act, 1956, Prohibition of Fraudulent and Unfair Trade Practices and broker regulations.

The notice comes even as the Central Bureau of Investigation has booked brokers and unidentified officials at NSE and SEBI for preferential access through the co-location service that allows traders to place servers in the bourse's building and directly connect to its systems. The probe has delayed the exchange's initial public officer and SEBI had returned its settlement plea as the investigation is still on. The regulator had issued the first show-cause notice in May last year.

SEBI Chairman Ajay Tyagi had said in a press conference after the regulator's June board meeting that it had received the NSE investigation report in the co-location case and has “initiated enforcement actions”.

The market regulator has been under pressure to complete the probe after CBI started investigations, a third person told BloombergQuint on the condition of anonymity. The SEBI chairman, however, had denied any pressure at the press meet.

The central agency booked Sanjay Gupta, the promoter of OPG Securities Pvt. Ltd., his brother-in-law Aman Kokrady and Ajay Shah, a data cruncher and researcher, along with unidentified officials of NSE and SEBI who could have connived with the trio to allow the illegal activity to continue for years, the CBI said in its first information report.

BloomberQuint's multiple phone calls to Gupta remained unanswered.

The CBI alleged that Gupta managed to manipulate SEBI inquiry against the role of OPG Securities in the misuse of tick-by-tick architecture of servers by paying bribe to the officials of the stock market regulator. The agency carried out searches at multiple locations in Delhi, Mumbai and Bengaluru, a CBI official had told BloombergQuint.