Even as the Securities and Exchange Board of India (SEBI) is yet to deliver its verdict in the case related to National Stock Exchange's algorithmic trading practises, the income tax department now seems to be investigating the extend of unfair gains by some brokers through the algorithmic trading platform.
According to sources requesting anonymity, income tax officials on Thursday searched several places in Mumbai and Delhi connected with the stock brokers and a few former and current officials, who are related to the case. NSE has not officially responded to the news, but officials, however, say no search was conducted in its premises.
The case dates back to 2015, when a whistle-blower sent a letter to the market regulator SEBI highlighting problems at NSE's co-location facilities.
Co-location means the server of a particular broker is located within the premises where the exchange's datacentre is located, for a fee. This helps in faster, high speed data movement. NSE launched the co-location services in 2010.
It was alleged that a few brokers have got preferential access to the exchange's algo-trading platform.
NSE hired consulting firm, Deloitte, to conduct an independent audit and lapses were found. The lapses were acknowledged by the exchange in its draft red herring prospectus, which was issued last year, in connection with a proposed initial public offering.
Deloitte's review had pointed out potential preferential treatment given out to a few members. One particular stock broker almost consistently connected first to the fall back or secondary server during the period from December 10, 2012 to May 30, 2014 and this may not have been possible without the knowledge of certain employees, who did not take any action despite consistent connections to the fall back servers against protocol, the audit had found.
The exchange had planned an IPO this year, but has had to push it to the backburner in the wake of the case.
In June, SEBI sent show cause notices to NSE as well as some of its senior officials in the algo-trading case. The people who were issued show cause notices included Chitra Ramakrishna, former MD and CEO; and Ravi Narayan, who quit as vice chairman of the exchange earlier this year.
Some reports also suggested that premises of few officials who had been show-caused by SEBI were also targeted in the income tax search.
The IT searches come just a couple of days after the exchange submitted two forensic audit reports in relation to the co-location case to SEBI.
NSE had roped in consulting firm E&Y (Ernst & Young) to carry out a forensic audit of its cash market, currency derivatives and interest rate futures platforms. The Hyderabad based Indian School of Business (ISB), was also roped in to find if any brokers named in the earlier Deloitte report had made abnormal profits by being able to log in first to its servers.
NSE has refused to divulge the content or findings of the two reports, which the regulator will now study and then pass on its judgement.
Addressing the matter has been among the top priorities for new CEO and MD Vikram Limaye who took charge in July. The exchange has already filed an application under the settlement regulations of SEBI to settle the case under the consent process.
