The Securities and Exchanges Board of India (SEBI) has started a preliminary probe into allegations against Multi Commodity Exchange, BSE Ltd. and National Stock Exchange made by an anonymous whistleblower. The same whistleblower had earlier flagged off the issue of preferential access to price feeds for some trading members on the NSE.

In the latest letter (dated February 14) to the SEBI, the whistleblower has accused the NSE of favouritism when it comes to allowing National Long Distance (NLD) license holders to install dark fiber connection.

Dark fiber is the pipe connecting a trading member’s co-location servers at the BSE and NSE. Such a connection allows the trading member to get the best prices on both exchanges quickly and choose the better of the two. Co-location facility is offered by exchanges in which a trading member can placer his server in the same premise as the exchange’s main server for faster connectivity.

“It is assumed that when a carrier is raising an invoice for the link, it would be using its own infrastructure (equipment),” the letter says. It goes on to add: “In reality, the carrier is nothing more than a billing conduit. Actual networks continued to be owned by unlicensed vendors who install devices and fiber path to speed up the links.”

The letter cites an example of Videocon, which owns a defunct NLD license, of which the actual network is owned by a Mumbai-based firm called Comtel which delivers speed links.

“With no clearly defined policy as to when and how it permits competing carriers into colocation, NSE can continue to ensure advantages for a select few in its good books,” says the letter.

The letter says that NSE has been preventing Videocon from coming on board on the ground that it did not own the telecom equipment, but also mentions another network solutions firm which has been denied approval without any specific reason.

“SEBI is doing a preliminary examination as is the standard procedure in such instances,” a source told Moneycontrol.

The letter says that Comtel has been installing dark fiber links between MCX and NCDEX even though SEBI is yet to define co-location rules for commodity exchanges.

“It is strange that the same vendor which has been denied access at one SEBI-regulated exchange can operate as an approved service provider with active support at other SEBI-regulated exchanges," it says.

The letter says there are no controls over abusive market prices like spoofing/flashing on both exchanges, but it is worse on BSE. Trading algorithms are capable of generating buy and sell orders to create an illusion of demand/supply—a practice known as spoofing. These orders are modified before other market participants can react to it. But such orders can momentarily influence other players to up their bids or lower their offer prices, thus distorting the market.

In theory, high frequency traders cannot modify the price of their orders, till the first of their orders is confirmed by the exchange and displayed to the market. Some players have worked their way around this rule by following up an order with a request to cancel it immediately. So the order would be flashed on the broadcast, but cancelled before anybody can react to it.

“The state of affairs on the BSE is even more interesting. BSE has no practice of holding up any requests for modification or cancellation; the practice on their platform is to simply queue up all requests received. Thus at BSE, it is even easier to spoof or flash orders,” the letter says. #casansaar (Source - MoneyControl)