After a forensic audit, a Deloitte report also identified brokers who were second and third to log in to the server, but the focus is currently on those who had logged in first.
Market regulator SEBI’s forensic audit in the NSE co-location server controversy on the will be restricted on the 13 brokers who logged in first to the back up server on multiple occasions, a source close to the development told Moneycontrol.
However, the report by Deloitte, which was asked to conduct a forensic audit of the NSE’s derivatives trading system shows that of the 42 brokers who availed of the co-location facility, 22 members were consistently first, second and third to log on the NSE servers repeatedly between 2012 and 2015.
"SEBI is conducting a forensic audit on brokers have done the maximum number of early logins on the server," the source said, adding "multiple first-time logins raises the possibility of collusion between NSE officials and brokers, which needs to be checked by the forensic auditor."
NSE too has issued show cause notices to the 13 trading members who logged on first, and used the back up server.
In 2015, an anonymous whistleblower had written to SEBI saying that some trading members on the NSE who had subscribed to the exchange’s co-location server facility were getting an unfair advantage by way of faster access to the exchange’s trading engine which disseminates prices. The whistleblower alleged that the trading members were able to do so by colluding with some exchange officials.
The Deloitte report also identified brokers who were second and third to log in to the server, but the heat is currently on those who had logged in first.
“NSE has issued show cause notice to 13 brokers and one broker was excluded as he had surrendered his broker license before the whistleblower letter," said another source. "The rest were not contacted for investigation.”
Edelweiss Financial, which was the second and third to log in on two occasions, received a clean chit from NSE after submitting a reply.
“NSE issued a show cause notice to Deutsche a few months ago, but after receiving reply they have given a clean chit to the broking company,” said a source.
Other firms on the list of 22 brokers who logged in early on the NSE servers repeatedly include Kredent, Pace, Religare Securities, OPG Securities, NYCE, Motilal Oswal, Kotak Securities, DE Shaw, SMC Global, Crimson, Advent, Mansukh Stock Brokers, JM Global, AB Financial, Indus Broking and Quant Broking.
“NSE offers co-location facility to all its member brokers. A large number of member brokers, including Kotak Securities have been using the same. In the normal course of business, Kotak Securities has been using NSE-approved vendor’s CTCL software to access NSE’s trading platform from co-location facility. We are not privy to the contents of the Deloitte report that you are referring to. Further, we are not aware of our position in the queue in connecting to the exchange, as this information is not shared with members”, Rohit Rao, Spokesperson, Kotak Mahindra Group.
NSE declined to comment on this development. SMC Global, Motilal Oswal Securities and Religare securities also refused comment.
SMC Global Securities, who operates across India, had repeatedly logged in to the secondary server between 2012 and 2015. NSE did not issue a show cause notice to SMC Global, but SEBI has sought a clarification from the firm..
As per the Deloitte report, the foreign broking houses that logged in early on the secondary server include Deutsche Equities and Barclays Securities. However, Deloitte did not find them to be repeat offenders.Approximately 65 percent of NSE's business comes from the co-location facility. SEBI had asked the exchange to put its co-location income into an escrow account.