NSE Co-location Scam: Everything You Need To Know!

Stock Market scams aren’t new. India has witnessed several scams that have caused enormous losses for several investors all over the country. Each of the scams has its own story and uniqueness. The co-location scam is one such unique case in the history of the Indian Stock market that you would love to read till the very end. So let’s dive into the details of the scam before any delay.

What Is the Co-location Facility? 

To better understand the scam, you need to get a clear-cut understanding of the co-location facility. In layman’s language, co-location is a space where you would get to know the stock prices a bit earlier than most of the crowd, thanks to the highly computerized system. Several algo traders rent out these areas for trading in the market.

These are precisely next to the exchange servers area in the NSE. Since the facility is closer to the stock exchange server, traders got an upper edge in improving the latency period. Brokers and investors mainly use the co-location area for proprietary trading. 

Because of the proximity to the exchange server area, these traders got prior information about the stock, buy/sell orders, and many more. Brokerages operate from all over the country, especially in the metro cities like Mumbai, Delhi, Kolkata, Bangalore, and many more. Each and every brokerage has its clients who log in at various times and place their orders. Prior information about the price won’t affect the retail investors, but it helps the big traders who bet large chunks of money on the market. 

Co-Location and Tick-By-Tick!

Tick-By-Tick, or what is known as the TBT, is one sort of data feed where the information doesn’t get distributed uniformly among all the parties. Therefore, because of the co-location facility, big algo, and high-frequency traders came to know the information earlier than the masses.

In TBT, the data gets distributed depending on when someone logs in to the system, while in a broadcast, data is distributed uniformly.

Who Understood this Loophole?!

Every scam occurs because of a mastermind who understands the loophole. In the case of the co-location scam, OPG Securities was one such mastermind who realized the TCP/IP protocol loophole that the TBT system used to distribute the data. OPG Securities understood how to access the data before others and even took help from some NSE officials.  

When the common people got to know about the scam, SEBI, the highest security management authority of the Nation, investigated thoroughly with the Technical Advisory Committee, which finally revealed that there was unfair support from within the NSE. Without any internal consent, it’s implausible that any broker would get access to such a prestigious exchange’s confidential secondary server data for two years, from 10th December 2012 to 30th May 2014. 

Focus on the OPG Securities

On further digging, other names came to light, and one such name was Omnesys. The company was in charge of NSE’s technology and even had the National Stock Exchange as its investor till 2013. The Delhi-based OPG Securities was wise enough to hire a former Omenesys employee for a much better understanding of the exchange’s system. Apart from this, the firm took the help of Chitra Ramakrishna, the NSE CEO, back in those days, and she appointed Subramanian. 

Unfolding the Scam

According to officials’ statements, the scam came to light when a whistleblower complained about the co-location issues to the SEBI authorities in 2015. After that, the complete scenario of fraud happening behind the screen was disclosed to the general public. When Moneylife revealed the scam, the management of NSE took a severe step toward the media authorities and even filed a 100 crore defamation case against Moneylife. Things got worse when the matter progressed to the High Court eventually.

However, the Bombay High Court finally made a verdict by dismissing the case and thus dismissing all the allegations made by the NSE. In addition, NSE had to pay a penalty fee of around 50 lakhs for the charge of taking arrogant action for the media report of Moneylife.

Actions Against OPG

In action taken by SEBI against this scam, the board ordered OPG securities in 2019 to pay back the unfair means of profit they earned during the period. As per the sources, the profits amounted to 25 crores, and SEBI even levied an additional 12% on the profits made from 7th April 2014. 

After this scam came into the light, SEBI, in the year 2016, asked the NSE to conduct all the legal investigations in forensic audit to carry out the report of the system related to all the transactions and deposits that took place in the NSE’s system from its co-location facility area. Deloitte was given the task of completing all the audits related to forensics in the exchange.

There will be hidden players for any scam, and the NSE co-location scam isn’t an exception. In this case, Ravi Narain and Chitra Ramakrishna were the prominent faces behind the fraud. On revelation, Narain and Ramakrishna had to pour 25% of their earned salary during the specified period.

Understanding the Complications: Is NSE Co-Location Scam the biggest Indian Stock Market Scam?

Interestingly, there hasn’t been concrete data on how much profits these traders made by taking advantage of the preferential access to the co-location facility. While some have stated the scam to be around 50,000 crores, others have reported it to be a 75,000 crores scam. If we consider the whistle-blower’s report, there was an outflow of confidential data to other countries, including Singapore. After so many years of the scam, officials are yet to disclose the exact number of foreign and national players who took the help of the NSE employees for misusing the data. While SEBI imposed crores and lakhs on the top management employees who came to the limelight, several others have criticized this step as not an adequate measure compared to the unfair profits made in real life.

The fate of TBT Data Feed: Is it Still Used Today?

Whenever a scam happens, people lose confidence in the market. SEBI tried its best to deal with the criticalities and started to frame stringent rules for restoring people’s trust and regulating the system and exchanges.

There has been a migration to the MTBT data feed post scam. Unlike TBT, MTBT data feed doesn’t allow “first come, first serve” data distribution. Therefore, MTBT ensures an equal flow of the shares’ data irrespective of a user log-in time. So there is less chance of such a scam surfacing again in the future.