The Securities and Exchange Board of India (SEBI) has imposed heavy penalties in a 2015 ‘dark fibre’ case that saw certain brokers exploiting the National Stock Exchange’s (NSE’s) internet infrastructure to get faster connectivity to its co-location (Colo) facilities.
The market watchdog has imposed a penalty of Rs7 crore on NSE and Rs5 crore on former managing director and chief executive officer (CEO) Chitra Ramkrishna. It has also levied a fine of Rs5 crore each on former group operating officer Anand Subramanian and current chief business development officer Ravi Varanasi.
Separately, Internet service-provider Sampark Infotainment has been asked to pay Rs3 crore, while online trading firms Way2Wealth and GKN Securities, have been asked to cough up Rs6 crore and Rs5 crore, respectively.
A dark fibre or unlit fibre, with respect to network connectivity, refers to an already laid but unused or passive optical fibre, which is not connected to such active electronics or equipments which do not have other data flowing through them and are available for use in fibre-optic communication.
The latest 186-page order follows a 2019 ruling
where SEBI had barred Sampark from providing telecommunication (telecom) services to any securities market intermediary.
The regulator had then directed NSE to deposit Rs62.6 crore, Way2Wealth Rs15.34 crore, and GKN Securities Rs4.9 crore. The order was appealed before the Securities Appellate Tribunal (SAT) where hearings are pending.
It has been alleged that the cabling for NSE’s Colo rack was engineered such that Way2Wealth and GKN Securities got the benefit of lower latency, as opposed to other trading members connected to Sampark.
NSE, on 31 August 2009, had issued a circular for Colo, which allowed brokers to avail P2P connectivity since 2009. NSE Colo allows stockbrokers to take on rent specific racks designated for this purpose and co-locate their servers and systems within the exchange premises, in order to have a low latency connection to the exchange. The primary objective of co-location services is to reduce latency for connectivity to the exchange’s trading systems for direct market access (DMA), algo trading and smart order routing (SOR).
However, in April-May 2015, NSE allowed Sampark Infotainment, an unauthorised service-provider to give P2P connectivity to two brokers, Way2Wealth Brokers Pvt Ltd (W2W) and GKN Securities (GKN), from its Colo facility to BSE's Colo centre.
Sampark allegedly laid dark fibre connectivity for these brokers with the promise of more bandwidth and lower latency for their data transmission and continued the service even after it was found that Sampark did not possess the necessary licence from the department of telecommunications (DoT) to provide the required P2P connectivity to the brokers of NSE.
SEBI’s show-cause notices (SCNs) were backed by three detailed reports: SEBI’s technical advisory committee (TAC), NSE-appointed forensic auditor, Deloitte Touche Tohmatsu India LLP (Deloitte) and, finally, an independent audit by Ernst & Young. Significantly, all three investigations established wrongdoing.
In the latest order, SEBI states: “Undoubtedly, GKN established direct peer-to-peer (P2P) connectivity between its racks located in NSE colo and BSE colo centres with the help of dark fibre or near-dark fibre provided by an unauthorised service provider which assured more speed and low latency, thereby assuring faster data transmission and assuring GKN of faster access to market data disseminated by NSE in comparison to other high-frequency trading brokers located in the colo facility of these two exchanges.”
The regulator didn’t buy GKN’s argument that its turnover didn’t increase manifold due to the advantage it gained from early access to market data.
“The entire issue is about gaining more speed and accuracy in executing its trades in keeping with its trading strategy, resource allocation, and views on market price. It is nobody’s contention that more speed and latency will necessarily result in more trading volume,” reads the SEBI order.
The order further observes even “Way2Wealth was a direct beneficiary of preferential treatment by the NSE, since the exchange allowed Way2Wealth to continue to use the Sampark line, even after knowing that Sampark did not have the requisite licence to provide such connectivity.”
SEBI also didn’t accept Way2Wealth’s submission that lapses were due to oversight and that it had no prior knowledge of the licence status of Sampark.
SEBI says this deprived other brokers using the colo facility “who, in good faith and in compliance with the NSE guidelines, did not take dark fibre services from any unauthorised vendors and instead stuck to their regular telecom service providers.”
Coming down hard on NSE, the SEBI order says the Exchange had failed to conduct a site inspection of GKN, “indicating favourable treatment by the NSE, which shows a collusive nexus between the NSE and GKN in the matter of P2P connectivity to the detriment of several other rules abiding stockbrokers.”
Justifying the penalty on Chitra Ramkrishna, the SEBI order says, “The CEO of an organisation cannot escape accountability and responsibility with respect to the day-to-day operations of various functional divisions.”
The order makes similar arguments in the case of Mr Subramanian and Mr Varanasi. Given their key positions at the Exchange, they cannot be absolved of the responsibility for lapses at the Colo facility, the market regulator’s order adds.
The order also penalises officials at the NSE and Sampark for facilitating an arrangement between Sampark and Reliance Communications to take over its existing infrastructure, which, says SEBI, was “an attempt to give post-facto legitimacy to an unauthorised activity of Sampark.”