Regulators RBI and Sebi have stepped up probe into alleged lapses in high-frequency trading offered through NSE's 'co-location' facility, while the role of some top officials including board member and ex-CEO Ravi Narain is also being looked into.
The finance ministry is also keeping a "close watch" on the entire case and wants capital markets watchdog Sebi to fast-track the investigations as it involves the country's largest stock exchange in terms of turnover and may have a bearing on the overall market sentiments, sources said.
"The show-cause notices have been issued by Sebi to the exchange and several top executives including Narain as also some former top management personnel and these would be soon followed by 'summons' for their personal hearings," a top official said.
Multiple sources including from the regulatory authorities, the government as well as from the exchange itself said that pressure is building from within the board of the exchange, from some of its shareholders and a few other stakeholders for exit of some top as well as mid-level executives.
While sources close to the top management of the exchange vehemently denied any move regarding exit of Narain or others, one of the senior-most board members described the situation as "a complete mess" and said stern remedial measures have become necessary to send across a strong message.
"It has become very important to tell the world that the exchange is serious about keeping its image clean and acting against any lapses, rather than sweeping things under the carpet," he said, pointing out that the delay in "closing the matter" has begun to result in several resignations at top-to -middle levels.
When contacted, an NSE spokesperson declined to give any official comment on specific queries and said: "As the matter is under discussion between NSE and the regulator, you will appreciate that we will not be able to comment on your queries.
"The Securities and Exchange Board of India (Sebi) has also received 'references' from agencies like CBI as well as from some MPs regarding the case, in which the regulator began a probe in early 2015, months after it was brought to light by 'whistle-blower' complaints but no conclusive action has been taken as yet, a top official said.
The case relates to some brokers allegedly getting preferential access through co-location facility at the National Stock Exchange (NSE), early login and 'dark fiber' -- which can allow a trader a split-second faster access to data feed of an exchange.
Even a split-second faster access is considered to result in huge gains for a trader.
Some staff members allegedly told the forensic auditors that they acted on "advice from seniors" regarding preferential access for some to the co-location facility and this allegation is being looked into specifically by Sebi, the official said.
Besides, "a missing trove of emails" may play a key role and the regulator feels it is possible to retrieve the same despite earlier assertions that it is not possible to access the same.
"While there is no concrete evidence so far to suggest any direct involvement of any top executive in the entire matter, the investigations would look into role of each and every individual especially those in high positions and against whom complaints have been received.
Among other issues, Sebi is looking into complaints raising the issue of 'independence' of a forensic probe into the matter as Ravi Narain, who was NSE's MD and CEO during 2010-13, was part of the team of board members of the exchange that supervised the forensic investigation done by Deloitte.
Sebi had sought comments from NSE's board on this matter as the period of investigation assigned to the forensic auditor was 2010-15.
The regulator will take into account these comments, which have been since submitted to it.
"The probe (by Sebi) has gathered significant pace in the last couple of months and a conclusive action should be expected soon," the official added.
The regulatory official observed that any further delay in concluding the matter may raise questions about the regulatory process itself as it involves a major market infrastructure institution which also acts as a front-line regulator in Indian stock market.
The Reserve Bank is also looking into any possible impact on the exchange traded currency and interest rate derivatives market.
Earlier, RBI had asked Sebi whether "the alleged short- comings in NSE's system architecture" pertained to operations of these market segments, which come under the dual regulatory oversight of the central bank and the markets regulator.
It was also alleged that some brokers colluded with NSE's employees and outsourced staff to obtain information regarding load and starting of servers, including backup servers.
This enabled 'first-to-connect' brokers to get data ahead of others for three years between 2011 and 2014.
Besides, differential access in the form of 'dark fiber' was allegedly given to one trading member at NSE in particular to connect across NSE and BSE co-location at least 4-5 months ahead of other members, as per the complaints.
While the probe is already said to be taking a toll on the exchange's proposed IPO, for which it is awaiting Sebi's clearance and was asked to provide clarifications, sources said that the NSE has submitted all the details sought by the regulator.
"Processes are being followed (regarding the co-location probe) and closure is expected soon," a source familiar with the top management's thinking said.
On complaints relating to Narain, these sources said there was no 'conflict of interest' and the entire process was supervised and monitored at multiple levels, including by the entire board and the market regulator Sebi itself.
The forensic auditor had also flagged non-cooperation of NSE employees during the course of investigation and similar issues were faced by the Sebi expert committee as well.