Big fines on the way in NSE dark fibre case

SEBI slapped heavy penalties on all the concerned parties in the colocation case involving the National Stock Exchange (NSE). The case which came out in the open in 2015, is also better known as the dark fibre case, wherein a slew of brokers were offered the privilege of exploiting the NSE internet infrastructure. The idea was to get a microsecond advantage by getting faster connectivity to its colocation  facilities. Large brokers collocate their servers at the exchange premises to get quicker price feeds and better execution of algorithms.

The penalties for the breach of trust have been quite heavy this time. SEBI has imposed a penalty of Rs7 crore on the NSE while it has separately imposed a fine of Rs5 crore on the former Managing Director and CEO, Chitra Ramkrishna. In addition, the regulator also slapped a fine of Rs5 crore on the controversial Group Operating Officer, Anand Subramanian. A similar penalty was also imposed on the current CBO, Ravi Varanasi.

Apart from them, the internet service provider (ISP), Sampark Infotainment, has to pay Rs3 crore.
That is not all. SEBI has also penalized the specific broker who gained from this privilege. This includes online trading outfits Way2Wealth and GKN Securities. They have been asked to cough up Rs6 crore and Rs5 crore respectively. In its last order of 2019, SEB had barred Sampark from providing ISP services to any security market intermediary. It had also directed the NSE to deposit Rs62.6 crore, Way2Wealth to deposit Rs15.34 crore and GKN Securities to deposit Rs 4.9 crore. That is under appeal before the SAT right now.

The manipulation is apparently quite interesting. Th every cabling for NSE’s colocation rack was engineered in such that Way2Wealth and GKN Securities got the benefit of lower latency (meaning quicker feeds), as opposed to other trading members connected to Sampark. That gave them an illegitimate advantage in executing algorithmic trades on the stock exchange. GKN Securities set up Peer to Peer (P2P) connectivity using dark fibre networks provided unauthorized service providers. This enabled faster data transmission.

While GKN did argue that it did not benefit substantially from the system, SEBI has rejected that argument. After all, the key issue here is about gaining more speed and accuracy in executing its trades, especially when you are looking at large scale high frequency algo trades with best pricing, not available to others. In the case of Way2Wealth, the NSE allowed them to continue using the Sampark line even after knowing Sampark did not have the requisite licence. This deprived other genuine brokers by gaming the system.

The accepted rule which all the compliant brokers followed was to not take dark fibre services from any unauthorised vendors and instead stick to regular telecom service providers only. In this case, the perpetrators of the entire scam were being rewarded with higher volume sand fatter profits. SEBI also came down hard on NSE for not conducting a site inspection of GKN. The penalty on Chitra Ramakrishna was justified on the grounds that the CEO of an organisation cannot escape accountability for day-to-day operations.