India’s market regulator, SEBI (Securities and Exchange Board of India), has closed the long-standing co-location case against the National Stock Exchange (NSE) and its officials due to insufficient evidence.
Kamlesh Varshney, a whole-time member of SEBI, ruled on Friday that there was not enough material to meet the "preponderance of probability" standard, which is required to establish wrongdoing. As a result, the alleged collusion between brokerage firm OPG Securities Pvt. Ltd. and NSE could not be substantiated.
The Co-Location Controversy
The co-location service allows brokers to place their servers directly on the exchange’s premises, enabling them to receive crucial price data fractions of a second faster than others. In 2015, whistleblowers alerted SEBI that some brokers, including OPG Securities, were gaining an unfair advantage through early login access at NSE’s co-location facility. This, they claimed, resulted in significant financial gains for these brokers, putting others at a disadvantage.
Following the allegations, SEBI’s investigation revealed that NSE’s tick-by-tick data dissemination system was vulnerable to manipulation. The market regulator identified 15 brokers for investigation and, in 2018, the Central Bureau of Investigation (CBI (NS:CBI)) filed a case against OPG Securities for allegedly exploiting the system for two years.
Financial Penalties and Investigations
For lapses related to high-frequency trading at the co-location facility, SEBI ordered NSE to disgorge INR 624.89 crore and banned it from accessing market funds for six months. After an appeal, the Securities Appellate Tribunal reduced this penalty to INR 100 crore.
OPG Securities was also directed to repay INR 15.75 crore with interest, though this penalty was later reconsidered. The matter was sent back to SEBI to reassess the punishment.
Lack of Due Diligence, But No Collusion
SEBI’s investigation concluded that NSE lacked a clearly defined policy for managing the co-location facility and failed to monitor the use of its secondary server by brokers. Despite this lapse in oversight, Varshney clarified that the failure alone did not prove collusion between NSE and OPG Securities.
Although OPG was logging into the secondary server until May 2015, after receiving a warning in 2012, Varshney noted that 93 other brokers were also using the same server. This reduced the likelihood of a deliberate conspiracy.
After examining forensic reports from Deloitte, EY, and SEBI’s external committees, Varshney concluded there was no conclusive evidence of wrongdoing. Thus, all proceedings against NSE, its officials, and OPG Securities were dismissed, closing one of India’s most significant market manipulation cases.
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