InvestorQ : What exactly is this co-location issue at the NSE on which the SEBI has passed the order on Monday?
Archita Jajjoo made post

What exactly is this co-location issue at the NSE on which the SEBI has passed the order on Monday?

Answer
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Rashi Mehra answered.
1 year ago


The NSE co-location issue dates back to the period between 2010 and 2014 when a handful of brokers like OPG Securities, GKN Securities and Way2Wealth Securities managed to gain unlawful access to NSE servers which gave them a profitable edge in trading. The SEBI order which looks to disgorge profits to the tune of Rs.1000 crore pertains to this co-location issue.

How did the co-location problem come about at the NSE?

Back in 2010, with a view to encourage institutions to put in algorithmic and program trades, the NSE allowed the brokers to co-locate their trading servers at the exchange itself. This co-location does give an advantage to the institutional investors of a few micro seconds and that is very valuable for large trades. Effectively, the institutions with co-located servers would have access to tick-by-tick (TBT) data on prices and volumes and hence it will be closer to the real position. That was an accepted practice, although it did give a small advantage to the institutional investors over the retail and smaller investors. But the bigger issue was a handful of such brokers getting an additional advantage.

It was all about the TCP / IP protocol used by NSE

Back in 2010 when the NSE first permitted brokers to co-locate servers in the stock exchange server room, the idea was to make TBT data available to institutions and algorithmic traders operating on huge volumes. But a handful of brokers managed to get an advantage over other brokers by connecting their server to the exchange back-up server rather than the main server. Since the back-up server was less crowded than the main server, it gave these 3 brokers an additional advantage and helped them to make abnormally high profits from trading. Of course, in 2014, the NSE shifted out of the TCP/IP protocol to the shared protocol and as a result this advantage did not exist after that. So, the entire case pertaining to the NSE co-location issue pertains to the period between 2010 and 2014 and the inordinate profits made during this period.