NSE Co-location Scam

In News

• The issue of co-location has come into the limelight once again in the wake of the latest order by the market’s regulator sanctioning former National Stock Exchange (NSE) MD and CEO over decisions taken by her under the alleged influence of a mysterious ‘yogi’.

About

• Meaning:
  • Co-location facilities are certain dedicated spaces in the NSE building and are extremely close to the dedicated exchange servers where algo and high-frequency traders can deploy their programs or systems.
  • Because the co-location facilities are so close to the stock exchange computers, traders who use them have an advantage over other traders because of the reduced time taken for order execution. However, institutional investors and brokers mostly employ co-location for their proprietary traders. 
• Limitation:
  • The co-location is mainly used only by institutional investors and brokers for their proprietary traders.
  • Retail investors have negligible presence here.
  • This preferential access allowed the algo trades of this member to be ahead of others in the order execution.

Implications for investors and traders

• Retail investors and traders do not participate in co-location facilities and hence are not impacted in any way by the scam.
• NSE has changed its order execution protocol in the co-location facility to Multicast TBT from 2014, thus plugging the loophole that allowed some to game the system.
• But the entire episode raises questions about the governance and system lapses at the country’s premiere exchange.
  • SEBI has been bringing about a series of regulatory changes to address these lapses.

Source: TH