Sebi appoints enquiry officer to vet Deloitte's forensic audit on NSE

The Securities and Exchange Board of India (Sebi) has appointed an enquiry officer to examine the forensic audit conducted by Deloitte India, a third-party auditor, on the National Stock Exchange’s (NSE’s) co-location facility. The appointment could be a precursor to passing a final order in the matter.

According to sources, the officer has been tasked with corroborating the Deloitte findings with the Sebi’s internal data. The regulator wants to ensure the system audit by Deloitte was in line with the directions given by the Sebi’s internal panel set up initially, a source said. Sources said the officer would also ascertain the exact volumes clocked when the NSE used the so-called unicast architecture at its co-location facility, which was later found to be prone to manipulation. 

Further, the officer will also cross-check the claim by the forensic auditor that there was no malafide or monetary benefit by any exchange official. 

Deloitte, appointed by the NSE to conduct a forensic audit following the Sebi directive, in its report, had said the stock exchange’s systems were prone to manipulation. The report, however, has not found any individual involvement or human fault, as flagged by the Sebi’s technical advisory committee (TAC). 

An NSE spokesperson said that since the matter was between the exchange and the regulator, the exchange would not be able to comment.

People privy to the Sebi's workings said an enquiry officer is appointed only in matters that need critical examination. The enquiry officer is expected to undertake inspection of investigation reports, documents and books of account. Later, the officer would submit the findings to the whole-time member and the Sebi board. It couldn’t be ascertained if the enquiry officer had been given any deadline to submit the findings. A final order in this long-pending matter is critical, as the issue has delayed the exchange’s mega initial public offering (IPO). Sebi Chairman Ajay Tyagi in April had said approval for the NSE’s IPO might have to wait till the co-location issue was addressed.  

Last year, the finance ministry had questioned the market regulator over its move to direct the NSE to conduct a forensic audit on itself. The ministry had asked the Sebi to explain the rationale behind advising the NSE to conduct a forensic probe on the lapses, rather than conducting it through its own expert committee. 

Sebi's TAC had submitted its findings in March last year to the regulator. In its report, the TAC had said some traders on the exchange had unfair access to market data and trading systems. The panel had recommended immediate action for lapses on the part of the NSE and the exploitation made by OPG Securities, a brokerage firm, under its guidance. 

The Sebi began probing the matter in early 2015, after it received at least three complaints, which alleged certain brokers colluded with the NSE’s employees or outsourced staff to obtain information regarding loading and starting of servers, including the back-up server. 

According to the Sebi, the complainant also alleged that the NSE's system enabled first-to-connect stockbrokers to receive data ahead of others. The said set-up was used for three years (2011-14). Later, the exchange moved to a new multi-cast system, under which data packets reached all participants at the same time. The NSE also beefed up its surveillance systems and worked closely with the Sebi to address all concerns pertaining to the controversy.

How it all turned out 


January, August & October: Sebi gets three letters highlighting flaws at NSE’s algo trading systems 

November: Sebi team does fact finding of the complaints; sets up an expert committee to examine the matter 


March: Expert committee submits report to Sebi. Says NSE violated norms of fair access; asks the exchange to respond to the allegations 

May & June: NSE writes to Sebi saying it has addressed the issues; says will work closely with Sebi to make improvements 

September: Sebi directs NSE board to set up an independent examination; asks NSE to set aside revenues emanating from co-location facility in an escrow account 

November: NSE appoints Deloitte to conduct the forensic investigation, seeks time till December  

December: NSE submits report to Sebi which suggests NSE’s systems were prone to manipulation 


January: Sebi directs NSE to submit a comprehensive action plan to address the issues and findings raised in the forensic report   

February: Sebi board discusses the issue and mulls next action; U K Sinha directs another audit of cash and currency derivatives segment; Sinha retries   

March: NSE appoints EY to conduct forensic audit of the segment

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