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How a split-second advantage can bring huge unfair gains at the NSE
Context
- I-T has searched the premises of top former exchange officials as part of a multipronged investigation into how brokers got preferential access to the trading system.
What is the controversy pertaining to the National Stock Exchange (NSE) and algorithmic trading?
- The NSE is facing allegations that some brokers got preferential access to the trading system through the co-location facility at the stock exchange
- The allegations of unfair access were first made by a whistle blower in January 2015.
- The whistle blower stated that a few brokers were able to log on to the NSE system with better hardware specifications while engaged in algorithmic trading to their unfair advantage.
- The letter to Sebi alleged that sophisticated market manipulation had been taking place at the NSE co-location centre.
- It also said that NSE had allowed a non-empanelled Internet Service Provider (ISP) to lay fibre optic cables on the premises for a few stock brokers.
What is Algorithmic trading?
- Algorithmic trading refers to orders generated at superfast speed by the use of advanced mathematical models that involve automated execution of trade.
What happened after the allegation came to light?
- Sebi formed an expert committee under its Technical Advisory Committee (TAC) to examine the allegations against NSE.
What action has Sebi taken so far?
- It has issued show cause notices to NSE and 14 key management personnel as part of its investigation into alleged lapses in high-frequency trading or algorithmic trading.
- Sebi proposed measures to tighten rules for algo, citing concerns about fair access to markets.