Mumbai: A panel advising India’s markets regulator found evidence that high-frequency traders gained unfair access to the nation’s biggest stock exchange, prompting two of the country’s largest brokerage associations to call for a formal investigation.
The National Stock Exchange of India “violated norms of fair access,” according to a copy of the panel’s internal report seen by Bloomberg News. The committee recommended a probe into whether NSE officials worked with OPG Securities to give the New Delhi-based trading firm preferential access. It also called for an investigation into whether Way2Wealth Brokers benefited from a dedicated fibre-optic line between NSE and BSE, India’s second-biggest bourse.
The NSE declined to comment, while BSE denied any suggestions it provides preferential treatment. OPG denied any wrongdoing and said it hasn’t been contacted by regulators. Way2Wealth didn’t immediately respond to a request for comment. The Securities and Exchange Board of India (Sebi) didn’t reply to an e-mailed query on the panel’s conclusions, which were first reported by Mint newspaper on April 5.
“Sebi should investigate whether someone got preferential access and frame comprehensive guidelines to stop it once and for all,” said Naresh Maheshwari, president of the Association of National Exchanges Members of India, a group of 900 brokers. “HFT and other communication technologies are perceived to be against retail or traditional investors.”
The allegations of unequal market access in India, the biggest emerging market for computerised trades, echo complaints about how modern markets operate around the world. Critics say exchanges go too far to cater to high-speed traders, whose strategies depend on placing orders faster than anyone else. Regulators from Washington to Beijing are in the process of evaluating what, if any, curbs are warranted.
High-frequency and algorithmic traders have turned from small players into a dominant force on Indian markets over the past five years, enabled by a race for speed between the nation’s top exchanges that cut transaction times to fractions of a second. Such strategies now account for 40 per cent of total volumes in India, the highest proportion in the developing world and up from the low single digits five years ago, according to Aite Group, a Boston-based consulting firm.
The panel’s findings raise questions as to whether unequal access was a byproduct of that rapid growth, or the result of deliberate decisions that gave select traders an advantage over others. India’s Brokers Forum, an association with 800 members, will make a formal request to SEBI urging a probe into the panel’s findings, said Jitendra Panda, a governing board member.
“We will write to SEBI to urge a speedy investigation into these allegations,” Panda said. “Such practices should be stopped immediately and exchanges should ensure free, fair access.”
The SEBI panel’s report, which hasn’t been released by the regulator, says that between 2012 and 2014, NSE handled orders to trade on a first-come, first-served basis. The design of the exchange’s order-routing software — called tick-by-tick architecture — made it prone to abuse, the committee wrote. The panel said it didn’t have enough information to determine whether NSE officials worked with OPG to give the trader preferential access, calling for SEBI to investigate further.
When NSE changed its system in 2014, OPG’s volume of trades on the exchange plummeted, according to the panel’s report. Other brokers, however, were largely unaffected. The SEBI panel could not determine whether OPG or any other broker exploited the system before 2012 because it didn’t have access to data before that time, it said.
Arindam Saha, a spokesman for NSE, declined to comment. The Mint report cited the exchange as noting the report is preliminary, and that the bourse “always followed regulatory guidelines and standard practices.”
Sanjay Gupta, OPG’s chief executive officer, said the firm hasn’t done anything wrong. “We never indulged in any wrongdoings,” Gupta said. “We have not received any official communication from SEBI or the exchanges on this.”
The SEBI technical advisory committee issued the report after the regulator received three letters from a whistle-blower who claimed that NSE’s systems were being used by some traders to the disadvantage of others, according to Mint.
“It’s very clear and obvious now that the HFT route is benefiting a handful of players,” said Deven Choksey, a broker at Mumbai-based K.R. Choksey Shares & Securities Ltd., who has traded on Indian markets for four decades. “Our exchanges must own up to this.”
The panel found that Way2Wealth benefited from a dedicated fiber connection between NSE servers and those of a data centre used, but not owned, by BSE. Everyone else had to share a link with other traders, giving Way2Wealth a faster connection. The firm, whose listed parent company — Coffee Day Enterprises — also owns high-speed trader AlphaGrep Securities, saw its share of trading on BSE climb from 7.5 per cent in April 2015 to 12 per cent in August of that year, according to the panel’s report.
Arundhati Singh, manager of marketing and communication at Way2Wealth, didn’t immediately reply to a request for comment. Mohit Mutreja, a managing director at AlphaGrep Securities, said the company hasn’t received any official communication from SEBI and declined to comment further. AlphaGrep’s name wasn’t mentioned in the panel’s report.
Ashishkumar Chauhan, BSE’s chief executive officer, said in an e-mail that BSE has never owned its so-called co-location data centers, used by high-speed traders because of their proximity to exchange servers. This has been done to avoid conflicts of interest, he said.
“Current allegations of preferential treatment for getting faster data — being given to specific people — or faster execution facilities within exchange facilities, or ability to place orders only to few members with high speed is clearly not acceptable as they are against principles of fairness, efficiency and transparency,” Chauhan said in an e-mailed response to questions.