Market regulator Sebi has allowed the National Stock Exchange (NSE) to settle a case involving the misuse of its trading infrastructure by brokers. NSE is a first-level regulator, which will be paying Rs 643 crores to settle the case involving the misuse of its Trading Access Point (TAP) software. TAP was a software application deployed by NSE in 2008 on trading members' servers to manage connections and messages (orders/trades) of such members. Trading members, registered with NSE, connected to TAP to establish communication with the NSE trading system.
NSE's former MD and CEO Vikram Limaye and eight others got reprieve in the settlement as the exchange paid the amount of Rs 643 crores on their behalf to SEBI. In its settlement order, Sebi said that NSE, on behalf of itself and other applicants, has remitted the settlement amount of Rs 643 crore on September 25, 2024, the receipt of which is confirmed. Apart from NSE and Limaye, those who settled the case are; Umesh Jain G. M. Shenoy, Narayan Neelakantan, V. R. Narasimhan, Kamala K, Nilesh Tinaikar, R Nandakumar and Mayur Sindhwad.
A few high-frequency traders had allegedly manipulated the TAP platform to execute thousands of orders without being detected and crowding out other users. The misuse was detected four years later by the income tax department during its investigation into the Co-location case.
Sebi issued a show cause notice dated 28 February 2023 to eleven entities. The violation cited was that NSE did not take remedial measures to prevent/ discourage any possible bypass of TAP, the complaint dated November 20, 2013 and the deficiencies of the TAP system were not brought to the notice of NSE’s Standing Committee on Technology even after coming into effect of Sebi circular dated 06 July 2015 on ‘Cyber Security and Cyber Resilience Framework of Stock Exchanges, Clearing Corporations and Depositories.
Co-location Scam And TAP Misuse
The misuse of TAP in 2013 was unearthed four years later by the Income Tax Department during a probe into the co-location scam. High-frequency traders manipulated TAP by using software to gain unfair advantages. These traders avoided paying NSE’s transaction fees. The fraud involved select brokers gaining faster access to NSE’s data and trading facilities, providing an unfair advantage over others.
Introduction Of New TAP Software
In FY14, NSE rolled out new TAP software for co-location users. It was used to send orders from member servers to NSE, reducing latency by 400 microseconds to 100 microseconds. TAP was a software application deployed by NSE in 2008 on the servers of trading members for managing connections and messages (orders/trades) of such members. Trading members, registered with NSE, connected to TAP to establish communication with the NSE trading system.
The settlement applications filed by the applicants, along with revised settlement terms proposed by them, were placed before the High-Powered Advisory Committee (HPAC) during its meeting held on March 18, 2024. The Panel of WTMs accepted the recommendations of the HPAC to settle the matter on composite payment by NSE (for itself and other Applicants) for an amount of Rs 643 crore.
Further, the panel of WTMs was of the view that the settlement applications be accepted if, in addition to the aforementioned settlement amount, pro-bono community service of at least 14 days during the current financial year was undertaken by all the applicants, except NSE and G.M. Shenoy is a non-monetary settlement term.
