Securities Appellate Tribunal recently asked National Stock Exchange (NSE) to pay ₹100 crore towards SEBI’s (Securities and Exchange Board of India) investor protection fund for lapses in a case registered in May 2018 concerning an alleged co-location trading.

 

What is co-location?

  • Co-location is typically associated with a facility where a third party can lease a rack/server space along with other computer hardware. Co-location facility provides infrastructure such as power supply, bandwidth, and cooling for setting up servers and storage of data.
  • In 2009, the NSE started to offer co-location services to members of the exchange.
  • Co-location allows a member to set up his server in a specifically earmarked data centre within the NSE’s exchange premises for a certain price.
  • And even though this data centre is located in a different wing from the exchange’s trading systems, the relative proximity allows members wishing to gain access to the entirety of buy and sell orders sent to the exchange by market participants, or tick-by-tick data, a headstart of a few microseconds or nanoseconds.

 

What is the controversy?

  • Co-location per se is not illegal. Stock exchanges across the world allow the practice to flourish as a paid service. The SEBI, in fact, had allowed exchanges to offer co-location in 2008.
  • However, a whistleblower in 2015 alleged that some exchange members were able to manipulate NSE’s co-location services to their own benefit with the support of certain officials in NSE’s IT department.