NSE colocation Fraud Involving NSE: What Is It?

Every aspect of the fraud has prompted concerns about the country's top stock exchange's governance and systems.

Colocation Fraud: What Is It?

To unravel the colocation con, one must first grasp the concept of colocation facilities. High frequency and algorithmic traders may set up their systems or programs in specific areas of the exchange building, directly close to the exchange servers.

Because of the lower latency caused by the proximity of the colocation facilities to the stock exchange servers, traders in this region have the edge over others.

On the other hand, institutional investors and brokers are the primary users of NSE colocation for their proprietary traders. There is little interest from retail investors in this area.

Naively, the NSE colocation facility was the scene of a fraud occurring more than a decade ago. Between 2012 and 2014, it was reported that one of the traders, OPG Securities, was given unfair access to the secondary server, allowing him to log in first and view the data before others from the colocation facility.

This member's share transactions were executed ahead of other members because of this special access.

What led to the scam's discovery?

In 2015, a whistleblower filed a complaint with the Securities and Exchange Board of India (SEBI) detailing the scam's complete operation. When Moneylife uncovered the fraud, the NSE's top brass took a bullheaded stance and filed a defamation action against the publication, claiming damages of Rs 100 crore.

NSE's claim was rejected by the High Court, which took a severe line against the company. In addition, NSE was ordered to pay Rs 50 lakh as restitution for its arrogant response to the media.

What was the scam's financial impact on the victims?

Remember that no evidence exists to show that any investors or dealers have suffered losses because of the NSE colocation fraud.

On April 7, 2014, the Securities and Exchange Board of India (SEBI) issued an order requiring OPG Investments and its executives to return illegal profits of $ 15.7 billion-plus interest of 12%. That's how much other privileged trading members in colocation facilities may have lost, if any.

When and how did SEBI's investigations continue after that?

SEBI ordered a forensic investigation of NSE's infrastructure and an escrow account to hold all of NSE's colocation income in 2016. NSE's systems were subjected to a forensic examination by Deloitte.

In 2019, SEBI ordered NSE to pay Rs 625 crores with 12 percent interest and prohibited it from raising capital via stock exchanges for six months.

An order was issued against those who were considered to be involved in manipulating the system and those who were not.

In a February 10, 2021 judgment, NSE was fined Rs 1 crore, while the people involved were fined a total of Rs 25 lakh each.

Summary: NSE colocation is prevalent among the brokers and institutional investors. A few years back, there had been a big NSE colocation scam which enthralled the limelight of the SEBI.