With the arrest of former National stock exchange managing director and CEO Chitra Ramkrishna in a co-location scam case on March 6 by the Central Bureau of Investigation (CBI), the focus will now shift on how the whole episode was planned, as the central agency interrogates her. Ms Ramkrishna has been sent to a seven-day CBI custody for questioning.
Ms Ramkrishna, who accepted that she had been guided by a “Himalayan Yogi” while taking key decisions during her tenure as the head of the country's top stock market, was arrested after an almost four year probe by CBI against a Delhi-based stockbroker.
The central agency's probe received a shot in the arm after market regulator Securities and Exchange Board of India (SEBI) released a report indicating alleged misuse of power by the top management of NSE in the matter.
According to the SEBI report, Ms Ramkrishna, who was appointed as the managing director and CEO of NSE in April 2013, sought the guidance of the mysterious “Himalayan Yogi” in all personal and professional matters for around 20 years.
While legal actions are being taken in the entire issue, let us try and understand what exactly are co-location facilities and what is the scam all about.
Co-location facilities are dedicated spaces attached with facilities like power supply and bandwidth, which can be leased by a third party for high-frequency as well as other trading processes.
Traders can rent such spaces and set up their systems or programmes to indulge in trading activities.
NSE started co-location services in August 2009, where due to the close proximity to stock exchange servers, traders got faster access to the price feed like buy or sell quotes distributed by the stock exchange.
The faster access to data helped traders receive quotes earlier than others and execute trade faster, thus resulting in profits for them. Also, since the charge for these services was high, only big brokers could afford to rent such a space.
What is the NSE co-location scam?
In the entire episode, it has been alleged that some brokers in connivance with insiders, took advantage of the fact that NSE provided data on first come first serve basis for making handsome profits.
In other words, the trader who logged in to the NSE server first, would get access to information like buying or selling as well as cancellation of orders, compared to others who logged on to the server later.
This is called 'Tick-By-Tick' (TBT) data feed, which disseminated information sequentially in the sequence the brokers connected or logged in to the server, unlike a broadcast where everyone gets the price information at the same time.
Brokers at the co-location facility are given details of the servers and the ports to which they could connect to access the price feeds.
A whistleblower in the case alleged that OPG Securities, with help from some officials in NSE's IT department was able to figure out which server had the least load so that they could get connected to the NSE server faster. The trader had allegedly mapped multiple IPs to a single server to get access to the first two or even three connections to that exchange server and crowd out other members.
Chitra Ramkrishna's alleged role in co-location scam
CBI's probe in the co-location case has revealed that the TBT architecture was prone to manipulation which compromised market fairness and integrity. The agency, in its remand application submitted before the Rouse Avenue Court in Delhi, against Ms Ramkrishna had alleged that NSE, headed by her, did not consider the principles of fair and equitable access while taking a decision regarding the system architecture.
The CBI had registered a criminal offence against Sanjay Gupta, Aman Kokrady, AN Shah, M/s OPG Securities Pvt Ltd and unknown officials of SEBI and NSE in May 2018. The CBI in its FIR had alleged that during the period of 2010 to 2014, the owner and promoter of OPG Securities, in collusion with unknown officials of NSE abused the server architecture of NSE. This enabled the said company to login first to the server of NSE and get the data split-second faster than others leading to an unfair advantage.
Till 2014, information was disseminated by exchange server to the brokers attached with co-location facility through TBT based system architecture.
"Launch of co-location at NSE was a major policy decision wherein role of MD & CEO and senior officers of NSE was decisive. The investigation has revealed that Ms Ramkrishna worked as Joint MD, NSE from 2009 till March 31, 2013. During her tenure as Joint MD, NSE, the co-location was conceptualised and implemented. She was appointed as MD & CEO of NSE on April 1, 2013. During the period of 2013-16 after Ramkrishna took over as MD & CEO, M/s OPG Securities Pvt Ltd was allowed to connect to a secondary server of the COLO-TBT Dissemination server for over 300 trading days causing it undue gain," the CBI claimed in its remand application.
It is further submitted that M/s OPG Securities was warned repeatedly in the year 2012 that accessing the secondary server is a violation of the rules/guidelines of the NSE. "NSE however, stopped issuing such warnings to OPG Securities without any justifiable reasons during 2013 when Ms Ramkrishna was MD & CEO of NSE," the agency claimed in its remand application, adding that they have also identified the person who was responsible for putting in place the co-location architecture at NSE and that the said person was reporting to Ms Ramkrishna.
Investigations into the TBT architecture of NSE have revealed that NSE, headed by Ms Ramkrishna, failed to implement a "randomiser" in its TBT architecture. NSE failed to implement a load balancer and did not adhere to its policy for equitable allocation of IPs. NSE, under the leadership of Ms Ramkrishna, purposefully did not have defined policies and procedures with regard to Secondary Server access which gave an unfair advantage to unfair brokers at the cost of others, the probe agency said.
Meanwhile, a Delhi court on Wednesday (March 9) remanded Anand Subramanian, the ex group operating officer of the NSE, to fourteen days judicial custody, in connection with the co-location scam case.
Mr Subramanian was arrested by the CBI on February 24.
The CBI official produced him before the court of Sanjeev Aggarwal on Wednesday. The federal probe agency moved a plea before the court saying he wasn't required for further questioning and requested the court to send him to judicial custody. The court allowed the move of the CBI and remanded Subramanian to fourteen days of judicial custody. He will now be lodged at Tihar Jail.
Recently, SEBI had imposed a fine of Rs 3 crore on her, following the market regulator finding that she allegedly shared vital inputs about the NSE with the “Himalayan Yogi”.