The role of the National Stock Exchange (NSE) officials in the ‘dark fibre’ controversy has come under the scanner of the Securities and Exchange Board of India (Sebi), with the regulator probing how non-internet service providers (ISPs) were allowed to lay fibres in the NSE premises to service certain trading members.
A sub-committee appointed by Sebi is already probing the issue and is learnt to have requested the NSE to provide more information about the lapse, sources told FE.
The investigation was initiated after a Singapore-based anonymous whistle blower wrote to the regulator and the finance ministry alleging a collusion between NSE officials and some of its members. The letter alleged that the NSE had violated the norms of fair access and allowed some brokers to benefit by providing a prioritised access through these dark fibers.
“As per the policy of the NSE, links could be terminated only by approved ISPs.
However, few trading members were allowed to terminate their links through non-ISPs. This provided an advantage to those trading members over others, especially in the aspect of multi-legged orders,” said a lawyer who is part of various consultative committees of Sebi.
A dark fibre is a dedicated communication line without any switch or multiplexer (MUX) and carriers data faster compared to a regular line laid by an ISP which works on the transmission control protocol/Internet protocol (TCP/IP) architecture of communication.
This is not the first instance wherein the exchange has been accused of providing unfair access to select trading members. Last year, Moneylife magazine had published a letter written by an anonymous whistle blower alleging that the NSE had provided a few traders access to its servers via co-location. Such access typically gives traders an advantage of 10-15 milliseconds – which is a significant time period in high-frequency trading(HFTs).
The NSE had filed a Rs 100-crore defamation case in the Bombay High Court against Moneylife on the issue.
Market participants have been requesting Sebi to regulate the algorithm trading and HFTs. The markets regulator had released broad guidelines for algorithm trading in 2013.
As per the guidelines, stock brokers and traders who deal with algorithm trading are required to undergo system audits once in six months to ensure that the system programmes are in line with regulations of the Sebi or the stock exchanges .
Sebi is currently working on the final guidelines for algo trading. The possible restrictions that could be placed on algo trading include determination of the resting period and fixing a benchmark for order-to-trade ratio, sources told FE.
These measures are expected check volatility, price manipulation and ensure level playing field between those using algorithms for their trades and those who don’t.