April 2022


Palak Shah, Author and Journalist

NSE was hit by a co-location trading scandal sometime in 2015 when a whistle-blower first complained to the Securities and Exchange Board of India (SEBI). Author and Journalist Palak Shah has done a deep dive investigation into the NSE co-location scam. His book The Market Mafia, published in November 2020, is a full-scale exposé of the deep rot in India’s financial market ecosystem. As a journalist working with some of the leading Business newspapers in Mumbai, Palak has much insight into the working of markets, exchanges, SEBI and regulations. Considering certain constraints, BCAJ sent him questions and carried this e-interview to throw light on how the NSE scam has unfolded and the delay in investigating it. Hope you enjoy reading it!

Q.1. Can you briefly explain the matter relating to the Colo scam and corporate governance issues at NSE?

Co-location (Colo) is nothing but proximity hosting of broker servers with NSE’s master order matching engine in the exchange premises at Bandra-Kurla Complex (BKC). It gives a superior trading speed and advanced information on price moves and order books. As I have detailed in my book, The Market Mafia, the Colo scandal goes back to 2010. When NSE started co-location trading, it lacked the necessary study from the market regulator SEBI and hence safeguards. There were flaws in the system, which investigations post 2015 revealed were deliberate. The flaws gave a few an advantage in connecting first and hence faster data and so on. Had SEBI made a proper study of NSE trading systems in 2010 or carried out a thorough audit and then given its go-ahead after a public consultation, the scenario would have been different. The deliberate flaws in the system were a result of corporate governance lapses at NSE, for which the accountability has to be fixed.   

Q.2. How was the matter unearthed?

In January 2015, an unknown whistle-blower first informed SEBI about the co-location scandal and certain flaws in the system. The then SEBI whole time-member Rajeev Agarwal pushed his officials into action, and the probe started in the weeks following the whistle-blower complaints. But even after Agarwal set the ball rolling, SEBI was slow in its approach and investigations since NSE’s top bosses enjoyed high patronage in New Delhi, and the regulators were scared to take them head-on. Multiple forensic and system audits by IIT Mumbai were carried out under SEBI’s instructions. NSE’s top management was hostile towards these investigations since they would not share the data and other inputs with the investigators. Yet certain facts on governance lapses and flaws in the system emerged. CBI registered an FIR in 2018 on the basis of a complaint but for four years the Co-location file kept gathering dust since no major investigation was done by the agency. It was believed by many th


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