Co-location Trading Scandal: Brokers Bring In Grant Thornton To Counter Sebi
Brokers commissioned Grant Thornton Bharat to "independently" review the methodology and computation used by the ISB
Among the stock brokers caught in the web of the infamous co-location trading scandal, nearly 15 of them are now claiming that the report by Indian School of Business (ISB), basis which market regulator SEBI had issued them a show cause notice is flawed. These brokers had commissioned audit firm Grant Thornton Bharat (GTB) to counter the ISB report. The GTB report has made its observations with regard to ISB's findings on the revenues and profits made by the brokers by trading on NSE between 2010 to 2015.
ISB report had shown that together all these brokers had made more than Rs 1000 crores in gains when they got preferential access to the NSE servers. But these brokers wanted GTB to "independently" review the methodology and computation used by the ISB to arrive at such a conclusion.
The brokers who were named in the SEBI investigation reports and by ISB, were also raided by the Central Bureau of Investigations (CBI). But in the view of the brokers, the ISB report is flawed, illogical since it has computation errors that led to exaggerated claims of gains by ISB. In fact, the brokers are of the view that there are were no abnormal profits at all.
What Is The Scandal About
NSE's high-tech trading system in the co-location facility at BKC in Mumbai, where brokers can place their servers close to the exchange's master trading engine, was abused by several brokers for nearly five years between 2010 and 2015 to gain preferential access and trading data from the exchange. The biggest scandal was that certain brokers, to achieve faster trading time and price information from NSE, used the Secondary Servers which were reserved for 'back-up' by the exchange.
While the Primary Servers were the designated server for public trading, certain brokers got inside information and knowledge of the means of using the Back-Up Secondary servers, which were faster since they had far less load compared to the Primary Servers. This inside information to the brokers on how to use the Secondary Server instead of Primary Server to trade at the NSE co-location facility and the timing of their Up Time and Down Time, came from the exchange officials.
Despite repeated login by brokers into the Secondary Servers, NSE took no action against them and just kept issuing warnings. But the investigations have been so botched up due to the involvement of influential people, some of whom were close to UPA era politicians and bureaucrats, and the trail was left cold for long giving a chance to the accused to destroy, distort and disappear the data and evidence.
What Does The GTB Report Say
As per GTB report, the ISB has made incorrect inclusion of overnight profits of the brokers, incorrect determination of secondary days (means days when brokers logged into Secondary Servers instead of Primary), incorrect inclusion of non-algorithmic trades and non-consideration of trade expenses, non-collocation trades that could not have been executed from secondary servers have also been included in the computation of the abnormal gains. All of these inconsistencies in the ISB report have inflated their alleged gains and hence there were no abnormal profits, the brokers are now claiming citing the GTB report.
The GTB report has further listed out flaws such as IBS's failure to consider charges incurred by the brokers and the colocation fees. Other flaws as stated in the GTB report includes comparison of non-comparable brokers, unjustified assumptions about trading factors. Also, the GTB report says the ISB has not considered statutory direct trade charges such as security transaction tax NSE transaction charges se turnover fees and stamp duties and collocation charges.
Further, GTB says that the number of days categorized by ISB as brokers connecting to Secondary Servers appears to be inflated, thereby overstating quantum of abnormal intraday profits earned by brokers on proprietary F&O trades. Also, according to GTB report the methodology adopted by ISB for determining the quantum of abnormal profits was flawed since it considered algorithmic as well as non-algorithmic trades for computing the abnormal profits.
Before Death, CBI's Original Complainant Sought Action On Broker Nexus
Nearly two weeks before he passed away of cardiac arrest, Shantanu Guha Ray, the original complainant to CBI in the co-location scandal had sought action against stock brokers, whose involvement was unearthed and is part of the legal records. Guha had also referred to the Secondary Servers in his letter this year.
Before his demise on March 25 this year, Guha had speed posted a letter to Praveen Sood, Director CBI and Madhabi Puri Buch, chief of India's market regulator SEBI, titled "Collusion of NSE with brokers, request to take action as per findings on record." Guha's letter states that he had also filed a writ petition in the Delhi High Court in 2020 seeking a court monitored probe into the matter as CBI and SEBI were going slow. The co-location scam broke out in 2015 after a whistleblower highlighted the modus operandi to SEBI. The CBI came into the picture in 2018 on Guha's complaint as SEBI was moving at a snail's pace in the matter.
In his letter before death, Guha said, "The investigations at CBI, searches already conducted on several brokers, wherein incriminating digital evidence including the email dumps, trading data, financial data of the stock brokers has been seized, further action is pending at CBI and SEBI. Despite all the facts, which are needed to prosecute NSE and Chitra Ramkrishna (former NSE MD), on the entire gamut of collusion with brokers both CBI and SEBI are shying away from complete full and comprehensive action by not bringing out their full collusion with brokers. This approach of not charging NSE of collusion with these aforementioned brokers as per the (irr) regularity of the secondary server connections will eventually ensure that that NSE and Chitra Ramkrishna will get away."
Guha had further said that the approach of SEBI and CBI was contrary to the stated position and undertaking of the CBI as submitted status reports dated September 2, 2009 and February 25, 2023 in proceedings before Delhi HC.
Stock brokers named by Guha in his letter include Millennium Stock Broking, Crimson Financial Services, GKN Securities, OPG Securities, Pace Stock Broking Services, Parwati Capital Market, Share India Securities. SMC Global Securities, Tower Research Capital Markets, Way2wealth Brokers, Adroit Financial, KM INVESTORS, PRB SECURITIES, Advent Stock Broking, CPR CAPITAL Services. A report by ISB had revealed the names of these brokers clearly in Table 14-15 on page no 61-62, Table 31-32 on page no 93-94, Table 70-71 on page no 139-140. Further, a show cause notice issued by Sebi to Ramkrishna on dated May 17, 2023 had also mentioned the names of the brokers in paragraphs 100-104 on page no 41-44 ; para 117-118 on page no 52-53, para 128-140 on page no 56-58, Guha's letter states. The CBI has also conducted searches at the premises of many of these brokers.
