Complete overhaulNSE will be rewriting entire policies and codes related to co-location.
The National Stock Exchange (NSE) is strengthening its policies and procedures related to co-location facilities even as the Securities and Exchange Board of India (SEBI) is looking into allegations of some brokerages having got preferential access at the exchange.
The NSE plans more safeguards and protocols and has hired an independent consultant to guide it on the implementation of the new procedures, which are expected to be put in place by the end of this month.
Co-location refers to the facility where brokerages can house their servers inside the exchange to get better speed for trade execution. Since the broker’s server is placed close to that of the exchange, the latency is reduced.
NSE started offering this facility in February 2010 and currently co-location accounts for about 20% of the cash market turnover and 30% of derivatives volume.
The review that will be exhaustive in nature comes in the midst of regulatory concerns related to the systems and processes at NSE, which are being addressed both, by the NSE board and SEBI’s Technical Advisory Committee (TAC).
“NSE will be rewriting entire policies and codes related to co-location,” said a person familiar with the matter, who declined to be identified as the process is yet to be made public. “All protocols will be clearly laid down in black and white, including those relating to escalation of issues. Also, all logs related to co-location would be recorded and maintained for a longer period of time.”
Deloitte, which conducted a forensic audit of NSE, had highlighted in its report that there were some lapses related to procedures and processes and it could have been that an NSE employee was also involved. It also stated that the technology used by NSE earlier to offer co-location service was prone to manipulation in terms of lags in information dissemination.
“Based on the Deloitte report, NSE decided to look at every single aspect of co-location to ensure everything is above board, transparent and nothing is left to unstated practices,” said the person.
SEBI received an anonymous complaint against the exchange in January 2015, alleging that certain brokers with co-location servers were getting access to market data before the others who also had such facilities within NSE. The complaint also alleged that employees of NSE were involved in the irregularities.
Incidentally, when NSE had started the co-location facility, it used a technology called TCP/IP in which there was a lag in information being shared between the co-location servers. Starting 2014, NSE moved to multicast technology wherein all the servers received the information at one go.
While NSE is going ahead with its plans to implement a new code for co-location, SEBI is also reviewing whether the exchange needs to be issued further directions based on the Deloitte report and its own internal findings.
At its latest board meet on February 11, SEBI took note of the matter and said that the NSE board, as advised by the regulator, had done an independent forensic audit and that the concerns were being addressed.
As part of its investigations, SEBI had also sent some officials and TAC members to the exchange, which had submitted a huge amount of data to both the regulator and Deloitte.