On the Monday morning of 18 May 2009, India's two benchmark stock indices Sensex and Nifty hit a 10 per cent upper circuit immediately on opening. As per norms, market trading was shut for two hours to let the emotions cool down. But at 11:55 am, traders were stuck with deja vu. Both the indices hit another circuit upon re-opening. So what was this euphoria all about? National Elections!
Then, the Sonia Gandhi-led Congress party was returning to power for the "second consecutive term." Lok Sabha election results that were declared on Sunday, 17 May, showed that the Congress party was winning "206 seats" and would manage to form the government with alliance partners (together called UPA) since in all, they had secured 262 seats. Then, the UPA was still 10 seats short of the majority mark of 272 but that did not matter much to India's stock market, which was hitting consecutive upper circuits like there was no tomorrow.
Comparatively, the same market was upset and fell more than 5 per cent on the results day on 4 June 2024 even though BJP and its alliance partners together had secured a comfortable majority in the current Lok Sabha elections by winning 293 seats (21 more than the required majority of 272). So what is causing the stock markets to behave differently? Did the stupendous rise in Sensex and Nifty in 2009 on the Congress party's victory justify the euphoria? Data suggested otherwise.
Then, the trading volumes on the NSE and BSE were abysmally low. Roughly, Rs. 127 crore (around USD 28.22 million, considering rupee to dollar conversion rate of Rs 45) worth of stocks could only be traded on the BSE in a few seconds or minutes when markets remained open. On NSE, the cash segment volumes stood at around Rs 170 crore (nearly USD 37.77 million). The derivative turnover, mainly concentrated in the index segment, stood at around Rs 1,000 crore (USD 222.22 million). These volumes were measly by all parameters to have justified the index hitting consecutive upper circuits. In total, a trade turnover worth less than USD 300 million (less than Rs 1500 crore) had shut down a stock market with a total market cap of around a trillion dollars even before much trading could happen. Incidentally, many large institutions were just bystanders on that particular day.
The Indian markets were witness to similar or much bigger events in the past but they were never shut for hitting the upper circuit limit consecutively before 18 May 2009. If at all, the circuits were hit, it was often on the down and backed by large sell orders that got executed at constant lower prices.
Be it the Harshad Mehta crash in the 1990s, the Dot-com bubble in 2001, the 2004 election crash when the BJP lost, the P-note crash of 2007 or the financial crisis of 2008, the Covid-19 crash of March 2020, the markets during these events fell under the weight of heavy sell orders. During the financial crisis, the Sensex and Nifty witnessed a gap-down opening but it took a long enough trading session to shut down the markets. Both the indices even managed to recover sharply post the cool-off session, since hitting the 10 per cent circuit breaker. Most importantly, the volumes traded on BSE and NSE were more than Rs 6,800 crore (USD 1.51 billion) on each exchange.
So, how can measly volumes shut equity trading in India, and that too so fast in 2009?
A vital clue to the market manipulation surfaced when stock market regulator SEBI stumbled upon an email by Ajay Shah, the blue-eyed boy of P Chidambaram (PC), the mundu-clad minister who was Sonia Gandhi's go-to man in the UPA Era. Then, Shah was a consultant to the finance ministry between 2004 and 2009 when it was headed by PC. The email SEBI found during its investigations into the Co-location scam, revealed that Ajay Shah was sharing the crucial TBT (tick-by-tick) data, clandestinely gathered from NSE in 2009, for commercial use to develop Algo software.
Such TBT data, which NSE did not share with anybody else, was extremely vital in decoding the full order book of the exchange, thereby giving a complete idea of the potential trading patterns. It is this data that Ajay Shah stole along with his wife Susan Thomas from NSE with the blessings of then ministers and bureaucrats in power that led the two consecutive uppers circuits in Nifty and Sensex, which hid a stock market scandal bigger than Harshad Mehta and Ketan Parekh. The book Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal and The Cabal That Went Scot-Free, details the full clandestine operation.
PC's Flash Boys And The Clandestine Stock Market Operation
On one side were Ajay and his wife Susan Thomas, two leading stock market research scholars who were never formally employed by NSE, yet remained ‘perfect insiders’ in the exchange for over two decades. They enjoyed the full support of P Chidambaram and his most trusted bureaucrat in the Finance Ministry, KP Krishnan, who was also on the board of Sebi.
Both Shah and Susan held key positions in crucial exchange committees and were awarded high-profile board memberships in NSE’s sister concern companies. Apart from further reach and network, it gave them a blueprint of the core workings of the stock market ecosystem and complete insider knowledge. All this when Susan had faked her PhD degree.
Sunita Thomas, Susan's sister, was married to Suprabhat Lala, a high-ranking NSE official who had worked and headed every department in the exchange from surveillance to broker compliances. Sunita was running a stock market algo trading software company registered at the address of Susan Thomas. The nexus was clear.
With unimpeded access, Ajay and Susan were being discreetly fed vital trade data from NSE all through 2009, just weeks ahead of the mysterious giant leap of Sensex and Nifty on May 18 that year, which shut down trading at the BSE and NSE on the election results day. There was so much information in the files NSE shared with Ajay that he passed it to Sunita's company IFPL for improving and back-testing their algo software Chanakya’s codes. The data NSE was sharing with Ajay was nothing but TBT data. All this came to light after the 2015 whistleblower exposé on the NSE co-location scam.
In 2009, when NSE shared TBT data with Ajay, wider market players in India had no clue of its use.
Big Revelations And The Trail
“You have to swear everyone to silence about the fact that the data we are getting out from the NSE is going into algorithmic trading work. It would be a severe problem if this fact comes to light since NSE has not given anyone else this data,” Ajay wrote to Sunita in 2009, just 12 weeks before markets hit upper circuits.
Election campaigning was at a feverish pitch when Ajay Shah was stealing data from NSE. In February 2009, Ajay had password access to NSE’s servers for data extraction.
“… on Day 1 Anupam is a finance guy. He is not a programmer. So drive him appropriately. He can go into all your existing projects– but in a domain knowledge role e.g. he can start working on trading strategies, which can go into all algorithm trading work. It would be a severe problem if this fact comes to light since NSE has not given anyone else this data," Ajay wrote in an email to Sunita, which was revealed during a SEBI investigation.
The investigation found that they had no intention of doing any work towards the volatility index, it was later done by an NSE subsidiary. The availability of confidential data with Ajay Shah and Susan Thomas and the market shutdown of 2009 thus needs to be studied in view of the ‘tell-tale’ email by Ajay to Sunita, which sets the perspective in place. SEBI has gone on to say that Ajay schemed to gather confidential data from NSE.
Certain other email exchanges between Ajay and Sunita, which were found during the SEBI probe into NSE’s Algo scam, revealed their clandestine operations.
“Data was shared with Ajay on the request of MD and DMD,” Ravi Apte, NSE’s chief of technology between 2007 and 2013, said during his interrogation by SEBI. His fingers pointed towards his two NSE bosses, Ravi Narain and Chitra Ramkrishna. Oral orders came from the top and other NSE officials too divulged during audit investigations.
The secret data pipeline to Ajay, Susan and their company IFPL was NSE’s worst kept secret since the exchange was never required to share any data for research purposes with them. The blatant data breach at NSE, involving the exchange's top brass, was unparalleled in the history of stock market scams in terms of sheer planning and scale. Ajay and Susan argued for a framework on Algo trading and even got the data on a platter which was obviously misused by them for their commercial gains by developing Algo trading products.
It was in February 2009 that Ajay was extracting crucial data from NSE, which went into preparing his Algos. His mission reveals itself when seen in conjunction with a key event that hung upon India’s stock market some 12 weeks into the future – results of that year’s general elections that would bring Congress back for the second consecutive term albit short of a majority.
So what caused the markets to come to a grinding halt on May 18, 2009? The play of the Algos, HFT (high-frequency trading) boats and advanced knowledge from TBT data, which is together summed up as ‘Flash Trade’. It could hit and run markets in a jiffy before the human mind could decide if it wants to partake a trade. For us, Ajay and Susan have detailed how India’s market cannot shut down without the force called ‘flash orders’. In their book, Indian Financial Market: ‘An Insider’s Guide to How the Markets Work,’ which was released in September 2008, the researchers talk about the resilience of Indian markets prior to the advent of fast-paced HFT-driven Algos
Their study confirms that a 2009-like market shutdown is highly impossible without the distortion caused by ‘flash boys’ orders’. But how? The book narrates a similar scenario like the 2009 general elections when the Nifty index had crashed sharply and yet trading was not halted as there were no HFT and Algo tools that could trigger circuit breakers with their latency and speed.
Playing in the market in 2009 and with the TBT data that gave them advanced knowledge of trades. That year, the ‘flash boys’ could preempt every order that came into the system. They had the full order book up to the last tick and kept hitting a higher price for the Nifty index on 18 May 2009 with the help of the speed bots, which led to the market shutdown. Who were these ‘flash boys’? Ajay and Susan? Their Godfathers in the Finance Ministry and brokers linked to them? Since the data they got on a platter from the NSE was something that nobody else in the markets had and it went into their IFPL’s Algo bot.
Like in 2009, the buy orders all came at high latency due to HFT and Algos and Nifty hitting a circuit before the counterparties could chip away at those orders. Comparatively, in 2004 when the Nifty fell 20 per cent on election results, no circuit breaker was triggered as sell orders lacked the speed of HFT and Algos and allowed the markets to chip away at the trades.
In a research paper titled ‘Measuring and Explaining the Asymmetry of Liquidity’, Susan herself detailed that in 2009, there existed more probability of being able to execute a single large order on the buy-side as the sell-side liquidity was worse than buy-side liquidity. With this, the positive news flow of the Congress-led UPA so called election victory (even though woefully short of a majority) was already supportive and it made it difficult for traders to express any negativity. At least on May 18, 2009, the next day of election results, it ensued a scramble among traders to buy, not knowing that HFT and Algo bots were already lurking to pre-empt their trade.
Boom! There were two consecutive upper circuits that day and a market shutdown. For the Congress, it made their victory historic even though the party was short of a majority on its own. Chidambaram, for whom the markets were his policy barometer, could do his chest-beating.
Illegal Co-location In Play Before Official Launch At NSE?
Was the Co-location grid, that allows brokers proximity hosting of their servers and hence faster trading at NSE, Operational at in 2009? Officially, the NSE said that it became operational in 2010. However, there is evidence to suggest that the COLO grid at the exchange was functional in 2009 and could have played a role in the market shutdown on the election results day that year. Google has a ‘Wayback Machine’, which is nothing but an internet archive library that stores billions of web pages that have been taken down by the operators or organisations but were created in the past. Since 1996, the Wayback Machine has been collecting and cataloguing websites, which to date exceed 240 billion web pages or almost two petabytes of data. Google may not archive every dot on a website but still whatever it records is just a snapshot of the web page and nothing is added or deleted from it. This is why many investigators the world over trust the Wayback Machine, to dig out past information that was hidden by organisations to wash off records.
Similarly, such past record of NSE’s website provides vital information about the COLO grid being operational at the exchange in 2009 too.42 The following is the screenshot of NSE’s web page captured by the Wayback Machine, at 9:44.22 AM on April 10, 2009. (Figure No) On the page, NSE boasted that it offered a COLO facility along with other tools. The circle on the top displays the date and time of the capture of NSE’s webpage by the Wayback Machine, (2009/04/10 – 9:44.22) and the bigger circle below shows NSE’s offering, which included COLO. How can NSE’s website claim to have delivered the COLO trading system a year before the exchange officially went live with it?
In 2009, ahead of the mega event, which was the general election results that year, Ajay and Susan had the TBT data, tech tools of IFPL and COLO grid too at their disposal (if we go by the claims of NSE website itself), to which the wider markets were in pitch darkness When the markets hit an upper circuit, perhaps all this was at play. And if it indeed was, then it becomes a scandal of UNPARALLELED magnitude, since the then NSE management had not divulged to the markets or SEBI that its COLO grid was operational. The Bhave apathy factor again… Was this the reason that Narain had offered to quit the NSE in 2009 itself? “In 2009, I informed the board of directors of my desire to retire. However, at the insistence of the board, I continued further and retired on March 31, 2013. After 2009, the day-to-day management rested with the then Joint MD Ms. Chitra Ramkrishna till I retired in March, 2013,” Narin told SEBI.
No Course Correction By India
A dissection of 2009's two consecutive market circuits suggested a lack of wider participation in the unexampled 20 per cent rally of the benchmark indices Sensex and Nifty. This was since the index futures turnover was only Rs. 1,000 crores (roughly USD 222.22 million) and almost all of that was concentrated in the Nifty index. Two exchanges, which had thousands of billion-dollar marketcaps, were being shut down in minutes via orders worth USD 300 million in cash and derivatives combined.
The 6 May 2010 flash crash in the US was a market fall that started at 2:32 pm (EDT) and lasted for approximately 36 minutes. It shut down the trillion-dollar American stock market. On 21 April 2015, nearly five years after the incident, the US Department of Justice brought in 22 criminal counts, including fraud and market manipulation against Navinder Singh Sarao, a British financial trader. Later, Algo spoofing, layering and front-running, all of it came out during an investigation by the US market regulator, SEC and it also found that HFT traders exacerbated the price declines.
The point is that often there is a fair investigation into the events in other countries that have large stock markets. People responsible are booked, criminal charges are framed and they are tried before a jury, something which is dexterously missing in NSE’s Co-location and Algo scam. This, despite the fact that there exist very severe grounds of serious criminal intent, which have to be investigated and tried by a law enforcing agency and are beyond the scope of SEBI. But CBI too bungled the investigations, which has been detailed by BW in its previous report here: https://businessworld.in/article/how-cbi-bungled-up-the-nse-scam-probe-499620
The full evidence and trail of the massive market rigging operation of 2009 and the following years can be found in the book The Market Mafia.
Comparatively, BJP and its alliance partners had won a comfortable majority under PM Modi and yet the markets were reeling under the colossal weight of sell orders, mainly by large foreign institutional investors who had mounted the largest ever short-selling bet in the Indian markets leading to a massive 6000 points fall in the Sensex and nearly 1500 points fall in Nifty index on 4 June 2024. Even though the sentiment was extremely negative due to rumour mondering, no circuit breakers were triggered.
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The writer is author of the book: The Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal & The Cabal That Went Scot-Free.
Palak has been a journalist in Mumbai for nearly two decades now. He has worked for most premier pink papers including The Economic Times, Business Standard and The Financial Express and The Hindu Business Line. He was drawn to crime reporting at the age of 19 but a few years in the field told him that the fabric of crime had changed and the organised gangs, as Mumbai had witnessed during the eighties, no longer existed. It was business and markets that dominated the scenario. His passion to unravel the intricacies of the ‘white money’ economy led Palak to the world of finance and regulations.
