Brokers connected to co-location case receive fresh notices: Sources

Regulatory experts have said that a recent Supreme Court order may prove a hurdle for SEBI in pursuing legal action against these brokers.

Several brokerages that were penalised between 2019 and 2022, following SEBI's investigations into NSE's co-location matter, have received fresh notices relating to the same, said industry sources.

Yug Securities, Pace Stock Broking Services, Share India Securities, Adroit Financial Services and SMC Global Securities have filed appeals with the Securities Appellate Tribunal .

Moneycontrol has written to the brokerages and the Securities and Exchange Board of India (SEBI) and the article will be updated once their responses come in.

Background
The market regulator had investigated several complaints alleging misuse of co-location facilities provided by the National Stock Exchange (NSE).

The brokers were alleged to have logged into the secondary server or backup server without sufficient reason. The secondary server was provided by the exchange only to be used in case of connection failure with the primary server. But trading members were alleged to have used this backup facility to get preferential access to TBT or tick-by-tick data feed provided by the exchange. This gave them an edge in the high-frequency and algorithmic trading world.

Some of the brokers were also found to have used the secondary server even after receiving reprimands from the NSE.

They were fined between Rs 3 lakh and Rs 5 lakh, in orders passed between 2019 and 2022. In the orders, the regulator noted that there was no quantifiable gain made by these trading members or loss made by investors.

The recent notices issued to these brokers seem to be about illegal gains made from these operations, according to sources.

Hurdle in the way?

Regulatory experts have said that a recent Supreme Court order may prove a hurdle for SEBI in pursuing legal action against these brokers.

On April 7, the top court said that the principle of res judicata applies to SEBI as well, which means that the regulator cannot reopen a case on which it has passed a final order unless new facts in the case emerge. Citing previous cases that debated the same principle of law, the apex court ruled on April 7, "It is not open to SEBI to claim that it could pass multiple final orders on the same cause of action."

Abhiraj Arora, a partner with the securities regulatory Practice team at Saraf and Partners, said, "This judgment may impact the show-cause notice/matters pertaining to co-location, wherein SEBI had earlier concluded the penalty proceeding and have now issued fresh notices for disgorgement."