The Central Bureau of Investigation's (CBI) exploration in the co-location case has revealed that Tick-by-Tick (TBT) architecture was prone to manipulation which compromised market fairness and integrity. The agency, in its remand application submitted before the Rouse Avenue Court in Delhi, against former MD & CEO of National Stock Exchange (NSE) Chitra Ramkrishna on Monday, had alleged that NSE, headed by Ramkrishna, did not consider the principles of fair and equitable access while taking a decision regarding the system architecture.
The CBI had registered a criminal offence against Sanjay Gupta, Aman Kokrady, AN Shah, M/s OPG Securities Pvt Ltd and unknown officials of Securities and Exchange Board of India (SEBI) and National Stock Exchange (NSE) in May 2018. The CBI in its FIR had alleged that during the period of 2010 to 2014, the owner and promoter of OPG Securities, in collusion with unknown officials of NSE abused the server architecture of NSE. This enabled the said company to login first to the server of NSE and get the data split-second faster than others leading to an unfair advantage.
Co-location is a set-up wherein the broker's computer is located in the same area as the server of the Stock Exchange. This particular set up of servers gives a speed advantage to the brokers availing the co-location facility in comparison to other brokers.
Till 2014, information was disseminated by exchange server to the brokers attached with co-location facility through TBT based system architecture. In this architecture, data was disseminated in a sequential manner whereby stockbrokers who connected to the server with lesser load would gain an unfair advantage, the CBI claimed.
"Launch of co-location at NSE was a major policy decision wherein role of MD & CEO and senior officers of NSE was decisive. The investigation has revealed that Ramkrishna worked as Joint MD, NSE from 2009 till March 31, 2013. During her tenure as Joint MD, NSE, the co-location was conceptualised and implemented. She was appointed as MD & CEO of NSE on April 01, 2013. During the period of 2013-16 after Ramkrishna took over as MD & CEO, M/s OPG Securities Pvt Ltd was allowed to connect to a secondary server of the COLO-TBT Dissemination server for over 300 trading days causing it undue gain," the CBI claimed in its remand application.
It is further submitted that M/s OPG Securities was warned repeatedly in the year 2012 that accessing the secondary server is a violation of the rules/guidelines of the NSE. "NSE however, stopped issuing such warnings to OPG Securities without any justifiable reasons during 2013 when Ramkrishna was MD & CEO of NSE," the agency claimed in its remand application, adding that they have also identified the person who was responsible for putting in place the co-location architecture at NSE and that the said person was reporting to Ramkrishna.
"Investigations into the TBT architecture of NSE have revealed that NSE, headed by Ramkrishna, failed to implement a 'randomiser' in its TBT architecture. NSE failed to implement a load balancer and did not adhere to its policy for equitable allocation of IPs. NSE, under the leadership of Ramkrishna, purposefully did not have defined policies and procedures with regard to Secondary Server access which gave an unfair advantage to unfair brokers at the cost of others.
Probe further revealed that certain brokers including OPG Securities unfairly gained an advantage by consistently the first member or among the first three members to connect to the TBT servers; by regularly connecting to the Secondary Server and NSE took no action to prevent this despite having knowledge of this (and its advantages) and OPG Securities had allegedly mapped multiple IPs to a single server such that it would often get the first 2 or even 3 connections to that server and 'crowd out' other members," the agency alleged in its remand application.
