Securities and Exchange Board of India (SEBI) in April ordered the NSE to disgorge money totalling ₹1,100 crore for not exercising proper due diligence while offering co-location services that allowed certain entities to gain access to information before others did. However, the SAT in May has partially stayed SEBI order on brokers in co-location case. 

  • Co-Location - Any trader with faster access to data has an edge over competitors. Hence, traders pay a premium to have trading stations located next to the servers of financial exchanges. That is co-location.
  • Dark Fibre - To speed data access up yet another notch, the trader who “co-locates” wants to use dedicated optic fibre networks. Such uncluttered networks are sometimes called Dark Fibre (this can also simply mean existing but unused optic fibre capacity on a network).
  • Disgorgement is repayment of ill-gotten gains that is imposed on wrongdoers by the courts/regulators.
  • Algorithmic trading uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader. Also trades have often been blamed for wild swings and flash crashes in the market.

All About The Issue :

  • The scam was exposed in 2015 when a whistleblower sent a letter to SEBI alleging that NSE provided preferential access to a few high-frequency traders and brokers to the exchange’s trading platform.
  • NSE’s use of the tick-by-tick server protocol had allowed certain high-frequency trading firms using the exchange’s secondary server to receive important market data before other market participants.
  • With the illegal speed advantage, the brokers under suspicion allegedly carried out high-frequency trades for four years between 2010 and 2014, enriching themselves and their clients to the tune of thousands of crores.
  • NSE had failed to exercise the necessary due diligence owing to supervisory laxity to ensure that it served as a fair marketplace. 

National Stock Exchange (NSE)

  • The NSE is the leading stock exchange of India, located in Mumbai and is the second largest in the world by nos. of trades in equity shares.
  • The NSE was established in 1992 as the first demutualized electronic exchange in the country.
  • NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system.

Securities and Exchange Board of India (SEBI) 

  • SEBI is the regulator for the securities market in India. It was established in 1988 as a non-statutory body and given statutory powers in 1992 through the SEBI Act, 1992.
  • Securities Appellate Tribunal (SAT) is a statutory body established under SEBI Act, 1992 to hear and dispose of appeals against orders passed by the SEBI, PFRDA, IRDAI. A direct appeal to which lies to the Supreme Court of India.

  Criticism of the SEBI Order : It has not yet been proven decisively that the firms with preferential access to data from the exchange managed to profit from such data.

  • Disgorgement orders are passed in cases where it is possible to establish that money or gains were made in a manner in which it shouldn't have been made.
  • There have been two high profile instances in the past when SEBI came out with disgorgement orders. One was in the IPO irregularities scam and then in the Satyam Scam. In both matters, the regulatory probe clearly showed that investors lost money due to fraudulent activities done by certain entities.
  • Also, without a plan as to how to identify investors who were harmed by securities law violations and disgorged funds may be distributed, the order is challenged before the SAT.


  • As the markets regulator, SEBI must deal with breaches of their supervisory brief by exchanges in an exemplary manner to ensure that small investors retain confidence in the fairness and soundness of key institutions that enable a market economy.
  • Further, effective and efficient enforcement of the measures taken by the SEBI to strengthen Algorithmic Trading and Co-location including the introduction of ‘managed co-location services’, tick-by-tick data feeds, allotment of a unique identifier for each also, among others must be ensured.

Sebi should look at possible conflicts of interests in areas such as research and technical advice. It should also consider the implications of NSE releasing confidential data to a restricted group. Also read: SEBI Directs Rating Agencies To Disclose Probability Of Default SEBI, MCA Sign Pact For More Data Scrutiny