Lok Sabha Question No. 4017 (UNSTARRED), answered on 2016-12-09
Subject: High Frequency Trading Companies
Ministry: FINANCE
Asked by: JOSE K. MANI, RAM CHARITRA

:

## O"NO* FAiRS

## LOK SABHA UNSTARRED  QUESTION  NO. 4017

## To BE ANSWERED  oN FRJDAY, 9t" DECEMBER, 20I61AGRAHAyANA  18, 1938 (saka)

## IIIGH FREQUENCY TRADING  COMPANIES

## QUESTION

## AAN. SHRI JOSE K. MANI: SHRI RAM CHARITRA NISHAD:

Will the Minister  of FINANCE be pleased to state:

- (a) whether SEBI was alerted by a whistle blower of unethical  practices followed by High Frequency Trading (HFT) companies  on the National  Stock Exchange fNSEI  and if so, the details thereof;
- (b) whether this manipulative  practice gives cefiain vested  traders market infonnation ahead of the rest of the market to leverage  the millisecond advantage  available  under HFT and if so, the details thereof;
- (c) whether  the NSE had refused to pa-rt with information on its operations and functioning  under the RTI Act in recent past;
- (d) ifso, the details thereof; and
- (e) the steps taken by the SEBI to monitor  and check sr"rch malpractices  in the NSE?

## AI{SWER

## MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI ARJUN RAM MEGHWAL)

(a): Yes Madam. The Securities  and Exchange Board of ln4.ia (SEBI) has informed that it received ihiee letters dated  January 2015,10t1'August 2015 and 28tr'October 2015 from a whistleblower making the following aliegations  with regard to the co-location facility of the National Stock Exchange  ${SE):

- i. Preferential  abcess to data dissemination  servers was given to few stock brokers
- ii. NSE allowedinon-empanelled internet service provider (ISP) to lay fiber in its premises for few stock  brokersl  and
- iii. Certain NSE officials colluded with the stock broker(s)  in the matter.

(b): SEBI had constituted  an Expert Committee under the guidance of its Technical  Advisory Committee (TAC) to examine the allegations macle by tlie cornplaiuant. The major observations  / findings of the Expert Committee following  examination  of the same were as follows:

- i. The architecture of NSE with respect to dissemination of Tick-by-Tick (TBT) through Transmission  COntrol Protocol / intemet Protocol (TCP/P) was prone to manipulation / market abuse.
11. Preferential  access was given to stock broker(s)  wherein it was possible for a stock broker  to log in to multiple disseminution  setu"rs through  multiple Internet  Protocols (IPs) assigned to him. It was also possible  for a single member to have multiple logins to a single dissemination  server through multiple Ips assignecl to it. trt was observed  that stock broker(s) had a substantial advantage by logging in first or even second and third'
3. NSE followed  a static mapping  process for allocating  members' IPs to dissemination servers due to which few brokerr *.t* uLtr to log on to the fastest dissemination servers. NSE had no load balancers for members  corurecting to the TCP/IP-based  TBT Dissemination Selvers. Further; NSE also did not have randomizers  for randomizing  member  positions  on the Disseminating  Serversl Ports. 111.

(c) and (d): National  Stock Exchange (|.{SE)  has informed that the applicability  of the Right to i"rorr""tili,  (RTI) Act, 2005 to NSE was affirmed by the Cenhal Information commission  and the Single Bench of tne ielhi High Court. However, the division  bench of the Hon'ble Delhi  Yi+ Corirt,  vide its Order dated May 4, 2010, stayed the judgment of the single  judge bench-of the Hon'ble Delhi High Court whic-h |rad  interpreied  NSE as a "public autholit{'under  the RTI Act' Hence, as on date,-NSE does not come undei the purview of the RTI Act. NSE has further informed that it had received only one application undel tG RTI Act in the last one yeff seeking information on its operations and iunctioning.  fn.  said application  from Shri. Arun Kumar  Agarwal sought information  on issues likes trading  details of price manipulation and insider trading in certain securities, applicability of RTI Act, defamation  suit, initial public offering by NSE etc' Notwithstanding the siay order of the Division Bench  of the Delhi High Cowt, the letter was responded to Uy NSe with all information  available  in the public domain  on November  11, 2016

(e): SEBI has informed  that the TCP-IP based TBT data broadcast  at NSE has been discontinued i"iirr.rr*rr*irrg,o  December, 2016. Further,  as an ongoing endeavour to consistently  upgrade and strengthen the systems and practices at stock exchanges in line with technological  advancements, Spgihas issuedregulatory  guidelines  in the form of Circulars fi'om time to time'

In the matter of co-location,  SEBI, vide Circular dated 13tl' May, 2015, has advised stock exchanges to ensur.e fair and equitable access to the co-location facility. Further,  vide Circular  dated 1't December, 2016, SEI|I has, inter alia, directed the stock exchanges to- further strengthen  the colocation  framework in order to ensure fair and equitable access, in the following  manner:

- i. To allow direct connectivity  between co-location facility of one recognised  stock exchange and the co=location facility of other recognized  stock exchanges.
2. ii" To allow direct connectivity  between  the servers of a stock broker placed in the co-location facility of a recognized stock exchange and servers of the same stock broker placed  in the colocation  facility of a different  recognizecl  stock exchange.

i Further, the co-location  services,pfovided connectivity to stock brokers have been colocation  facility. through  third parties and local area network  (LAhl) based brougSt under the ambit of reglllatory  framework for

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