The Securities and Exchange Board of India (SEBI) has taken action by sending a notice to the National Stock Exchange (NSE) regarding the alleged misuse of software by high-frequency traders. The misuse of the trading access point (TAP) software, which occurred in 2013, was discovered four years later by the income-tax department during an investigation into the co-location scam. This revelation has raised concerns about market fairness and the integrity of the trading system.
SEBI’s Show-Cause Notice and Retired High Court Judge’s Findings
Based on the findings of a retired high court judge appointed to investigate the TAP manipulation, SEBI has issued a show-cause notice to the NSE. The notice seeks an explanation from the exchange regarding the alleged misuse of software by high-frequency traders. The NSE’s former MD and CEO, Chitra Ramkrishna, and Ravi Narain, are among those accused in the co-location scam. SEBI’s action aims to hold accountable those involved in the manipulation of the TAP system.
Manipulation of TAP Software and its Impact
According to a report by the Economic Times, high-frequency traders exploited the TAP software to execute a large number of orders without detection, thereby crowding out rival brokerages. The traders used special software to manipulate the TAP system and circumvent transaction fees imposed by the NSE. This manipulation not only raises concerns about market integrity but also poses challenges to fair competition among market participants.
Discovery of Misuse during Co-Location Scandal Probe
The income-tax department stumbled upon evidence of the TAP software misuse during a raid conducted in 2017 as part of the co-location scandal investigation. Emails related to the manipulation of the TAP system were found, shedding light on the alleged misconduct. The misuse of software by high-frequency traders has significant implications for the functioning of the stock market and the need for robust regulatory oversight.
Ongoing Investigation and SEBI’s Response
In response to SEBI’s show-cause notice, the NSE appointed retired Kerala High Court judge Arvind Sawant to examine the matter. The NSE, in its annual report for fiscal year 2021-22, claimed to have received no show-cause notice from SEBI regarding the TAP issue. However, the market regulator rejected the NSE’s request to settle the matter under the SEBI Settlement Regulations, citing the ongoing investigation. The responses from SEBI and the NSE are still awaited, and further actions will depend on the outcome of the probe.
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