Ahead of IPO, NSE would do well to resolve algo trading controversy

As the National Stock Exchange (NSE) prepares for an initial public offering (IPO), allegations of its trading systems being prone to manipulation could prove to be a major hurdle.

The exchange has been under the Securities and Exchange Board of India (SEBI) scanner for violation of fair norms in algorithmic trading practices.

The issue had come to the fore after a whistle-blower wrote a letter to a business publication about unfair access to a few brokers in algorithmic trading. Select traders made quick bucks by using the co-location facility at the exchange with access to a server with the least load. This helped such traders trade faster than others who availed the same facility.

To look into the matter the regulator had hired Deloitte that confirmed some of the allegations.

In a letter to Sebi, dated February 14, the whistle blower had said, "I am glad to note finally some action has taken place on the complaints.”

However, the matter has not concluded and NSE continues to send notices to a host of brokers.

Why is it important for NSE to bring this case to a conclusion?

It is critical for NSE to lay this matter to rest to ward off any trouble for its upcoming IPO.

When a company offers its shares to the public, people’s confidence matters the most. With cases of unfair trade practices and system manipulation, mistrust can influence judgement.

Also, Sebi has been reserved on the whole issue which may not go down well with market participants as they expect a speedy trial.

After the regulator took matter in its hands, it directed NSE to set aside revenue generated from its co-location services. NSE reported monthly revenue of around Rs 55 crore from co-location services coupled with transaction charges linked to co-located servers.

As the matter of unfair algorithmic trading not winding up, NSE’s profits are at risk.

Investors hope the new NSE chief, Vikram Limaye will take requisite action against those accused as per the investigations, close this matter and prepare the exchange for its IPO, which is expected to be the biggest since 2010.

Another aspect to pay heed to is the trading practices in algorithmic trading, shortcomings in the system and the use of its co-location facility.