SEBI Co-Location Probe: How Much OPG Gained With First Access To NSE’s Server

OPG’s first-access gain belies size of NSE’s unfair access problem.

The National Stock Exchange Building in Mumbai. (Photographer: Vishal Patel/BloombergQuint)
The National Stock Exchange Building in Mumbai. (Photographer: Vishal Patel/BloombergQuint)

Four years of preferential access to the National Stock Exchange of India Ltd.’s server earned Delhi-based brokerage firm OPG Securities Ltd. Rs 25 crore in profit.

That’s what market regulator has alleged in its show-cause notice to OPG Securities, based on an audit by Indian School of Business, Hyderabad. BloombergQuint reviewed a copy of the notice.

This is the first time in its nearly three-year-long probe that the Securities and Exchange Board of India has put an amount to the gains made through unfair access to NSE’s co-location service. The gain may seem underwhelming when compared to the impact the alleged scam has had on the NSE—Chief Executive Officer Chitra Ramkrishna was forced to step down and the exchange’s IPO has been delayed due to the ongoing proceedings. But the issue of unfair access to a stock exchange can’t be measured in trading gains or losses, say experts.

“It’s not about money...whether it’s one rupee or countless crores, the effect is the same: the market is not a level-playing field,” said Patrick Young, a capital markets expert and chief executive officer of European crowd-funding platform Hanza Trade. “Exchanges need to maintain ‘my word is my bond’ and once that dictum has been breached, there is de facto a crisis of confidence.”

Agreed JN Gupta, former executive director at SEBI and co-founder and managing director at investor advisory firm Stakeholder Empowerment Services. “If the exchange has failed in providing fair access and has allegedly connived to give some members preferential access with mala fide intent, then it’s in violation of the SEBI Act.”

A spokesperson for OPG Securities, when contacted over the phone, declined to comment saying the matter is with the regulator and sub judice. SEBI has yet to respond to BloombergQuint’s emailed queries.

“The matter is with the regulator hence we will not be able to offer any comment.” said a spokesperson for the NSE in an emailed response.

Top NSE Officials ‘Facilitated’ Co-Location Fraud, Says SEBI Show-Cause Notice

How It Worked

SEBI has accused OPG of gaining first access to the exchange’s less-crowded secondary servers. The regulator gave an example of how the broking firm was the first to login almost all the time.

Citing investigations of an expert panel under SEBI’s technical advisory committee, the regulator said:

  • OPG was the first to connect 92.83 percent of the time in 2012 in the futures and options segment, and 99.20 percent in 2013.
  • It’s first-access rate fell sharply to 43.03 percent in 2014 after the exchange introduced a multi-cast system—broadcasting data to all parties at the same time.
They make higher rupee profits of about close to Rs 25 crores when they login early when compared to situations when they do not.
SEBI In Show-Cause Notice

OPG’s proprietary profit when it logged in first was Rs 15.55 crore, while it made a loss of Rs 2 lakh when the brokerage wasn’t the first on the secondary server between 2010 and 2014, according to SEBI.

“... lt appears that the profit advantage when looking at total profits is due to the fact that they login first more frequently than not,” the regulator said. “The frequency of early logins is extraordinarily high for this member [OPG].”

Two Other Brokerages Benefited Too

Way2Wealth, a Mumbai-based brokerage, and Delhi-based GKN Securities, were also a “direct beneficiary of preferential treatment by NSE” when the exchange violated its cabling policy. The regulator, in its notices, didn’t quantify the gains made by the two firms.

Way2Wealth and GKN through Sampark arranged the cabling in the co-location rack such that these firms had the lower latency—time for data to travel— compared to other trading members, SEBI alleged.

“NSE allowed Way2Wealth to continue to use the Sampark line even after knowing that Sampark didn’t have the requisite licenses to provide such connectivity,” said SEBI.

Emails and subsequent reminders to Way2Wealth were not answered. GKN Securities, in an emailed statement, said it has never acted in bad faith and always strictly adhered to all laws of the land. GKN said the firm took all requisite permissions from the NSE to establish connectivity. The brokerage, according to data on BSE, has OPG’s founder OP Gupta as one of its directors.

In a separate show-cause notice, SEBI alleged that NSE’s former top-ranking executives Ravi Narain, Chitra Ramkrishna and Subramanian Anand “facilitated fraud and manipulation” by failing to prevent the three brokerages from gaining preferential access to the bourse’s servers. The regulator accused them of fraud, violation of the SEBI Act and Securities Contract and Regulations Act.

The NSE, according to Young, has to take the blame. “The role of the exchange is to be an entirely neutral arbiter for transactions. Institutional trust is therefore a vital factor,” he said. “Having set their own bar intentionally above the level-prevailing within some aspects of Indian business standards, the NSE has fallen further with these accusations.”