The National Stock Exchange (NSE) is strengthening its policies and procedures related to co-location facilities even as the Securities and Exchange Board of India (SEBI) is looking into the allegations of selective brokerages getting preferential access at the exchange.
The exchange plans more safeguards and protocols and has hired an independent consultant to guide on the implementation of the new procedures, which are expected to be put in place by the end of this month.
Co-location refers to the facility wherein brokerages can house their servers inside the exchange to get better speed for trade execution. Since the broker’s server is placed close to that of the exchange, the latency is reduced.
NSE started offering this facility in February 2010 and currently co-location accounts for around 20% of the cash market turnover and 30% of the derivative volume.
The review that will be exhaustive in nature comes in the midst of regulatory concerns related to the systems and processes at NSE, which are being addressed both, by the NSE board and SEBI’s Technical Advisory Committee (TAC).
“NSE will be rewriting entire policies and codes related to co-location. All protocols will be clearly laid down in black and white, including those relating to escalation of issues. Also, all logs related to co-location would be recorded and maintained for a longer period of time,” said a person familiar with the matter. He declined to be identified as the process has not yet been made public.
Deloitte, which conducted a forensic audit of NSE, had highlighted in its report that there were some lapses related to procedures and process and it could have been that an NSE employee was also involved. It also stated that the technology used by NSE earlier to offer co-location service was prone to manipulation in terms of lags in information dissemination.
“Based on the Deloitte report, NSE decided to look at every single aspect of co-location to ensure everything is above board, transparent and nothing is left to unstated practices,” said the person quoted above.
SEBI received an anonymous complaint against the exchange in January 2015, alleging that certain brokers with co-location servers were getting access to market data before the others who also had such facilities within NSE. The complaint also alleged that employees of NSE were involved in the irregularities.
Incidentally, when NSE started co-location facility in February 2010, it used a technology called TCP/IP in which there was a lag in information being shared between the co-location servers. Starting 2014, NSE moved to Multicast technology wherein all the servers received the information at one go.
While NSE is going ahead with its plans to implement a new code for co-location, SEBI is also reviewing whether the exchange needs to be issued further directions based on the Deloitte report and its own internal findings.
At its latest board meet held on 11th February, SEBI took note of the matter and said that the NSE board, as advised by the regulator, undertook an independent forensic audit and the concerns are being addressed.
As part of its investigations in the matter, SEBI had also sent some of its officials and TAC members to the exchange, which submitted a huge amount of data to both, SEBI and Deloitte.