What Is The NSE Co-Location Scam All About? Read here.

Co-location facilities are dedicated spaces leased by a third party for trading purposes

With the arrest of former National stock exchange managing director and CEO Chitra Ramkrishna in a co-location scam case on March 6 by the Central Bureau of Investigation (CBI), the focus will now shift on how the whole episode was planned, as the central agency interrogates her. Ms Ramkrishna has been sent to a seven-day CBI custody for questioning.

Ms Ramkrishna, who accepted that she had been guided by a “Himalayan Yogi” while taking key decisions during her tenure as the head of the country’s top stock market, was arrested after an almost four year probe by CBI against a Delhi-based stockbroker.

The central agency’s probe received a shot in the arm after market regulator Securities and Exchange Board of India (SEBI) released a report indicating alleged misuse of power by the top management of NSE in the matter.

According to the SEBI report, Ms Ramkrishna, who was appointed as the managing director and CEO of NSE in April 2013, sought the guidance of the mysterious “Himalayan Yogi” in all personal and professional matters for around 20 years.

While legal actions are being taken in the entire issue, let us try and understand what exactly are co-location facilities and what is the scam all about.

Co-location Facilities

Co-location facilities are dedicated spaces attached with facilities like power supply and bandwidth, which can be leased by a third party for high-frequency as well as other trading processes.

Traders can rent such spaces and set up their systems or programs to indulge in trading activities.

NSE started co-location services in August 2009, where due to the close proximity to stock exchange servers, traders got faster access to the price feed like buy or sell quotes distributed by the stock exchange.

The faster access to data helped traders receive quotes earlier than others and execute trade faster, thus resulting in profits for them. Also, since the charge for these services was high, only big brokers could afford to rent such a space.

What is the NSE co-location scam?

In the entire episode, it has been alleged that some brokers in connivance with insiders, took advantage of the fact that NSE provided data on first come first serve basis for making handsome profits.

In other words, the trader who logged in to the NSE server first, would get access to information like buying or selling as well as cancellation of orders, compared to others who logged on to the server later.

This is called ‘Tick-By-Tick’ (TBT) data feed, which disseminated information sequentially in the sequence the brokers connected or logged in to the server, a broadcast where everyone gets the price information at the same time.

Brokers at the co-location facility are given details of the servers and the ports to which they could connect to access the price feeds.

A whistleblower in the alleged case that OPG Securities, with help from some officials in NSE’s IT department was able to figure out which server had the least load so that they could get connected to the NSE server faster. The trader had allegedly mapped multiple IPs to a single server to get access to the first two or even three connections to that exchange server and crowd out other members.

Latest Developments

Meanwhile, a Delhi court on Wednesday (March 9) remanded Anand Subramanian, the ex group operating officer of the NSE, to fourteen days judicial custody, in connection with the co-location scam case.

Mr Subramanian was arrested by the CBI on February 24.

The CBI official produced him before the court of Sanjeev Aggarwal on Wednesday. The federal probe agency moved a plea before the court saying he wasn’t required for further questioning and requested the court to send him to judicial custody. The court allowed the move of the CBI and remanded Subramanian to fourteen days of judicial custody. He will now be lodged at Tihar Jail.

Recently, SEBI had imposed a fine of Rs 3 crore on her, following the market regulator finding that she allegedly shared vital inputs about the NSE with the “Himalayan Yogi”.

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