NSE faces a second forensic audit of trading systems, this time by EY

0

Mumbai: After Deloitte, another Big4 accounting firm Ernst & Young  will carry out a forensic audit of trading systems of the National Stock Exchange (NSE), India’s largest bourse, said two persons familiar with the development.

NSE is fighting allegations of giving unfair access to certain brokers for high-frequency trading and colocation facility -a charge that was triggered by a series of whistleblower letters.

The EY audit will be the third round of investigation into the matter.

In 2016 Deloitte was hired for a forensic audit by the NSE following orders from the capital market regulator Sebi. This was after the findings of a regulatory committee which looked into charges of unfair access to certain brokers.After Deloitte submitted its audit report to Sebi, the regulator felt that another auditor should be called to check certain segments at NSE to put to rest potential allegations of conflict of interest.(Deloitte was hired as a consultant by NSE in the past).

“Since the matter is under discussion between NSE and the regulator, I am sure you will appreciate we will not be able to comment on your questions,“ an NSE spokesperson told ET.

forensic audit of trading in currency and cash equity segment and the firm is expected to submit its report sometime in May ,“ said a person who is aware of the terms of reference.

Deloitte, it’s believed, was appointed by the NSE board after deliberations and on advice of a committee which was of the view that there was no conflict of interest.

According to the DRHP filed by the NSE for its initial public offer, Deloitte in its report found that few stock brokers appeared to be able to connect to specific servers significantly faster than others. The system architecture was so designed that it disseminated data in a sequential manner, whereby the stock brokers connecting first were the first ones to get the information.Also, NSE did not have specific policies and procedures to regulate the laying of optic fibre cables at its colocation facility by non-internet service providers.

Faster data was allegedly provided to brokers connected to less crowded servers, thereby giving them an advantage over others. Some particular stock brokers were consistently the first or second people to connect to a fallback secondary server between December 10, 2012 and May 30, 2014. This couldn’t have been possible without the prior knowledge of some employees.

A whistle-blower in 2015 had first alleged that NSE was giving preferential treatment to certain brokers for algorithmic trading. This year the whistle blower again wrote to Sebi alleging the misuse of `dark fibre’ links. Such a link connects the co-location servers of a broker in two exchanges, enabling it to obtain stocks and currency futures prices on both exchanges and cut arbitrage deals in milliseconds by cashing in on the price differences.