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Deloitte forensic report says some brokers were given preferential treatment

The forensic review of the NSE’s co-location facility by Deloitte Touche Tohmatsu has found that certain brokers were given preferential treatment in connecting to the main server.

June 14, 2017 / 09:10 PM IST
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The forensic review of the NSE’s co-location facility by Deloitte Touche Tohmatsu has found that certain brokers were given preferential treatment in connecting to the main server. The report also says that the architecture of the Tick By Tick (TBT) data dissemination system was prone to manipulation. The second part was disclosed by the NSE in its draft red herring prospectus filed with SEBI for its proposed initial public offering.

The Deloitte report was tweeted by one Akansha Sharma (@Akansha8521), claiming to be an “ex-NSE employee, now settled in the US.”

Co-location or co-hosting is a service offered by stock exchanges to their members, for a fee, to locate their servers within the exchange’s premises, allowing them faster access to the price data disseminated by the exchange servers.

Sometime in early 2015, a whistleblower wrote a detailed letter to SEBI alleging how some NSE brokers who had availed of the co-location facility were profiting from a faster access to the NSE order book. Ideally, all brokers who had availed of the facility should get access on equal footing, but the whistle blower showed how a few select few managed to jump the queue, allegedly with the connivance of employees.

“Our analyses highlighted trends for certain periods whereby members such as OPG Securities, Universal Stock Brokers and NYCE Securities appeared to be the first to connect to specific servers significantly more than the others,” said the Deloitte report.

A major shortcoming of the report is that it has not attempted to analyse or draw a connection between early login into the system and the order to trade ratio of members.

If a member is able to connecting to the server ahead of others, it gives him the advantage of executing trades faster. An analysis of the order to trade ratio would have given an idea of whether brokers like OPG, Universal and NYCE were able to benefit monetarily because of the first mover advantage.

Deloitte’s view was that order and trading strategies of trading members were dependent on various factors other than connectivity.

The report says that some members were allowed to consistently connect to the fallback or secondary server, which was less crowded.

“We noted that due to the sequential dissemination of information, ticks were disseminated faster to members connected on less crowded servers, thereby giving an advantage to such members,” said the report.

The report said that it was possible for NSE to negate the advantage of connecting first by implementing a randomizer, which would randomly pick a connection to begin dissemination of data, rather than starting with the first in the queue. It said that NSE had developed a randomizer in 2011 but was only implemented for BucketPOP servers and note for the broader Tick By Tick system.

“Information regarding development of a randomizer and its implementation in BucketPOP was not disclosed to us by the NSE team until we identified it during our forensic analysis of source-code,” says the Deloitte report.

first published: Jun 14, 2017 09:10 pm

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