SEBI’s initial investigation report found that NSE had overlooked its subsidiary IISL, which did similar work.
Noted academician Ajay Shah connived with software services firm Infotech Financial Services to fraudulently use confidential data of the National Stock Exchange for developing and selling algo trading software, market regulator SEBI said in one of its orders in the NSE co-location case.
At present, Shah is professor at National Institute of Public Finance and Policy. He and his wife Susan Thomas have been associated with NSE and its affiliate companies since 1994 and are credited with developing the Nifty 50 index.
In 2009-10, NSE had engaged the services of Infotech Financial for computing of Liquidity Index (LIX). Infotech Financial is in the business of developing algorithm software for stock brokers.
Sunita Thomas, a director in Infotech Financial Services, is the sister of Shah's wife Susan Thomas. Sunita's husband Suprabhat Lala is an assistant vice president overseeing trading operations at NSE.
SEBI's initial investigation report found that NSE had overlooked its subsidiary IISL, which did similar work. Also, Shah, who was on the board of National Securities Clearing Corporation, did not disclose the potential conflict of interest by way of his relation to Sunita Thomas.
The report also observed that Ajay Shah, his sister-in-law and another director, with active support of NSE and its senior officials, misused the confidential and sensitive data provided by NSE to be used in the LIX project, to develop algorithmic trading software for sale in the securities market. Following is an excerpt from an e-mail written by Shah to his sister-in-law.
"..on day 1 Anupam is a finance guy. He is not a programmer. So drive him appropriately. He can go into all your existing projects-but in a domain knowledge role e.g. he can start working on trading strategies which can go into all algorithm trading work. (But you have to swear everyone to silence on the fact that the data that we are getting out of NSE for VIX and LIX is being used for algorithmic trading work -it would be a severe problem if this fact comes to light since NSE has not given anyone else this data.)"
In the final order, SEBI whole time member SK Mohanty said: "This single piece of evidence (e-mail) speaks volumes about the collusive involvement of Noticee no. 1 (Ajay Shah) with other Noticees and leaves no doubt about the fact that the aforementioned four Noticees were using the NSE trade data together for the development of algorithmic trading products with a commercial motive and not for the purpose for which the data was shared with them by NSE under the LIX project."
Mohanty said that Shah was instrumental in giving the LIX project to Infotech Financial and that he and his wife, Susan Thomas were working pro-bono on the said project.
"Curiously enough, NSE and its officials ignored the inter se family relations and also overlooked the issues of conflict of interest arising out of such relationships," the SEBI order said.Shah has been directed by SEBI not to hold, directly or indirectly, any position in the management of and/or in the Board of or be associated in any manner and in any capacity, with any Stock Exchange, Clearing Corporation, Depository, recognized or registered by SEBI and/or with any intermediary registered with SEBI or their related entities and/or with any company listed in any of the Stock Exchanges recognised by SEBI, for two years.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.