NSE’s volte-face: Backtracks on OPG Securities Suspension in the collocation controversy
The high-handedness of NSE stands exposed in the NSE collocation case when on Friday (12/9/2019), it completely reversed the order of suspension against OPG Securities in the colocation controversy.
In an order passed on 12th September by NSE’s Member and Core Settlement Guarantee Fund Committee (Formerly known as Disciplinary Action Committee or DAC), NSE has disposed of the show cause notice issued to OPG Securities in the collocation matter. This order reads as more of an explanation from the committee as to why they were wrong earlier. This is a complete turnaround from the stand taken by the then Disciplinary Action Committee (DAC) in September 2017, which had suspended OPG Securities for 6 months “for connecting to fallback (secondary) servers despite warning / communications from Exchange”. This turn around again underlines that enforcement actions taken to play to the gallery have very short shelf life and result in embarrassing backtracking.
In 2001 when Calcutta Stock Exchange collapsed in KP era an initial perception pointed to role of a leading industrial house being responsible. It was alleged that financing long positions in K10 stocks by this industrial house was withdrawn suddenly causing the leveraging to vanish and hence the collapse. The investigation into this was led by the highest committee in this country backed by who’s-who of the Investigating Agencies. The media played a crucial role in declaring guilt of the industrial house in this collapse. However, at that time, beyond the perceptions created by the vested interests, SEBI analyzed data, including order and trade data and found that this industrial house in fact did not withdraw any funding. The financing from them was fully available and was offered on exchange platform like before. Rather, the suspect Ketan entities did not accept the financing due to their own mounting losses. Forensic Audit of the relevant NSE data was also carried out to ensure that there was no possibility of any tinkering of NSE data and to certify the genuineness of this data. After this was done, the whole controversy around the role of this industrial house in the collapse of CSE came to a sudden and conclusive close. After that, all the vested interests who were propagating the theory on the guilt of this industrial house became totally silent on this topic.
As early as 2001, the role of analysis of order and trade data presented a story completely different from perceptions. Bestselling author and economist, Steven Levitt highlights a lot of such examples in his book, Freakonomics where data analysis reveals information which might be completely counter-intuitive at the outset. The importance of forensics and data analysis in any investigation now takes center stage as against source based leads. A prime example of this is the Income Tax Department which has almost totally moved away from Investigations based on sources. The department now uses extensive data analysis and forensics for investigation.
In NSE colocation case, it is rather shocking in this age that allegations have been flying while no real focus has been on data, orders and trades analysis. Perceptions have been created and then reinforced by media and vested interests in the collocation case that a major fraud has been committed by select brokers. The essence of the allegation was that a single broker was given preferential access leading to massive undue and illegal monetary advantage. Early Login and login to Secondary servers was the alleged modus operandi of the preferential access. Contrary to the myths propagated, SEBI in its April 30 order ruled that no-one benefited from Early Login as the system was random and no single broker connected first to manipulate the system. NSE now in its order of 12th September, 2019 has said that as many as 28 (out of some 30 active) colo- players brokers connected to secondary servers and the secondary server access was not monopolized by anyone.
The NSE collocation controversy acquired epic proportions mostly due to two reasons. Firstly, there was a vested interest to somehow make the public and agencies believe that there was a massive financial fraud; much bigger than the thousands of crores of vanishing of investors’ money somewhere else. These vested interests managed the media and played the system to create a perception of a massive fraud perpetuated by NSE in its collocation. Secondly, NSE apparently was extremely unprofessional in handling the issue right from the start. NSE failed to show with data analysis that system was absolutely randomly biased. Using order and trade data of a single broker, Prof. Pasumarthy highlighted that the TCP system of NSE was quite random and it was impossible for a single broker to get any advantage by early login or secondary login. He further highlighted that the so called preferential access was not limited to a single broker but was a general practice and was all pervasive (to all players). The blame lies squarely on NSE that they did not attempt any such data analysis across brokers. Data analysis would have conclusively dispelled the perceptions at the initial stage itself. It is shocking that NSE, the leading technology driven exchange did not appreciate the value of data analysis and continues to do so.
The data fields used by Prof. Pasumarthy were not unique to a single broker. Data of ticks and corresponding orders is the basic foundation block of algorithms. Such data would have certainly been available across all brokers and should have been used by NSE to establish whether there was any advantage in early login/ secondary login or it was otherwise. SEBI could have done the same when it conducted forensic audit across multiple brokers. One of the forensic auditors had identical data as used by Prof. Pasumarthy but it shockingly chose not to carry out the analysis. The forensic auditor had acquired the data with full chain of custody as per law. SEBI should have at-least instructed the forensic auditor to double check the analysis done by Prof. Pasumarthy. It is anybody’s guess why this data was not analyzed or used even after repeated requests — It would have shown without doubt that NSE’s system did not yield any advantage by early login or secondary login.
It is now clear that NSE and SEBI played to the pressure of perceptions while handling this matter. The intense media glare, perceptions perpetuated by vested interests and orders without application of mind cause crippling damage to businesses, reputations and goodwill. Select few brokers faced an astonishing amount of prejudice. The sad part is, that it is considered collateral damage.
The investigation into NSE collocation controversy reveal the dark facts of working of our agencies. People with vested interest can manipulate the media and the system to create perceptions. These perceptions are then forced on agencies by creating media pressure. The agencies are then forced to act in a specific manner to handle the all round pressure. Why would NSE, which was very well aware of the equitable access of secondary server in 2017, suspend only a single broker and that too for 6 months?
It is shocking that no serious investigation appears to have gone into the origin of “anonymous whistle blower complaints”. It is now obvious that there were many vested interests that worked hard to create wrong perceptions about “colo scam” for their personal ambitions, vendetta in one case, and also to divert attention of investigative agencies from a real serious financial fraud that had recently happened.
Collocation was alleged to be a fraud of more than Rs. 50,000 crores. Despite unparalleled — CBI, ED, IT and SEBI Investigation, what has come out? The sad part is, but for NSE’s callous defense and refusal to present the correct data out, this controversy would have been killed at the very beginning.
One just hopes that the limited data and analysis carried out by Prof. Pasumarthy is given its due, in the interest of justice, at least now.
Sadly, investigative agencies still think that the real culprit is tech used for access. In-fact, the real manipulation is done by algo strategies. It appears that both NSE and SEBI are clueless about the market manipulation through strategies which is going on even today. I will cover some of these strategies in my next articles.
All articles are here. The author advises market participants in legal matters related to securities markets and has advised some noticees in this matter also.
