The Securities and Exchange Board of India (SEBI) has imposed a six-month prohibition on the National Stock Exchange (NSE) from raising funds from the securities market. This restriction was imposed due to allegations of unfair access provided to high frequency traders through co-location servers.
Why NSE is Banned?
The rationale behind this imposed ban lies in SEBI’s findings. According to SEBI, NSE permitted high-frequency traders’ preferential access to co-location servers placed at the site of exchange. This facilitated faster algorithmic trading that could potentially result in an illegal practice known as front-running. SEBI maintained that NSE neglected to provide equal and fair access to all of its members when utilizing the algorithmic trading platform and co-location services.
Understanding Co-location
Co-location is a service that permits brokers to operate in close proximity to their servers in return for additional fees. This advantage speeds up data transmission as it takes less time due to physical proximity to exchange servers. Consequently, orders reach exchange servers more rapidly than those who have not opted for this facility.
Co-location and Dark Fibre
Dark fibre is a term used to describe a dedicated communication line where messages travel at a higher speed than regular lines due to the lack of other traffic. Although employing such speedy connectivity infrastructure is not inherently illegal, the secretive use by NSE led to an unfair playing field for other stakeholders.
What is Front-running?
Front-running occurs when a broker or entity participates in a trade because they have prior knowledge of a significant non-public transaction that will influence the price of the asset, often leading to financial gains. This may also occur when a broker or analyst purchase or sell shares for their account ahead of their firm’s recommendations to clients. Known also as tailgating, front-running is considered illegal and unethical as it capitalizes on private information not available to the public.
How will the Order affect NSE?
| Effect | Description |
|---|---|
| Financial Penalty | NSE is required to pay Rs 687 crore to the Investor Protection and Education Fund (IPEF) |
| Restriction from Capital Market | NSE is barred from accessing the capital markets for six months |
| Delay in IPO | The forthcoming IPO of NSE will be postponed till the year-end |
About the Investor Protection and Education Fund
The Investor Education and Protection Fund (IEPF) is a fund set-up under the Companies Act, 2013. It is maintained under the Consolidated Fund of India. The IEPF is where amounts that have remained unpaid or unclaimed for a period of seven years are transferred to. The authority overseeing this fund serves to promote investor education, awareness, and protection. It also has the mandate to refund shares, unclaimed dividends, and mature deposits.
