How a split-second advantage can bring huge unfair gains at the NSE

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.