Author: Piyush Shenoy, St. Aloysius (Deemed to be University), School of Law
To the Point
National Stock Exchange (NSE) Co-Location Scam remains one of India’s biggest financial scams, revealing an insider collusive relationship between systemic regulation failure and high frequency trading (HFT) brokers. In its fundamental premise, the scam was all about some brokers getting special permission to be seated at the co-location facility of the NSE, so that they can get stock price feeds milliseconds ahead of others—a humongous advantage in an environment where speed is money. The scandal resulted in all-out investigation from enforcing bodies such as SEBI, CBI, and ED, and renewed calls for transparency and reform in India’s financial regulation framework.
Abstract
For 2010-2014, some brokers were permitted to co-locate their servers next to NSE’s primary trading infrastructure—a global standard but, on this occasion, which was exploited to commit frauds. Some brokers were provided undue first priority over accessing the tick-by-tick (TBT) information feed through low-latency links. Helped by insiders, such brokers would keep logging on ahead of others and dominate best servers. This was unfair to the level playing field for the securities market. The issue was brought to light publicly through a whistleblower’s letter in 2015 and led to investigations at the behest of SEBI. Evidence concluded that there were violations of fair access principles. The scandal was later examined not only by SEBI and the Appellate Body for Securities (SAT), but also investigation agencies and courts such as the Madras High Court. This article analyses the timeline of events, legal violations, and broader implications for India’s financial regulation.
Use Of Legal Jargon
- Market Manipulation: An action which distorts market integrity by providing undue benefits. In this fraud, some brokers were given exclusive access to real-time feeds of information, which enabled them to influence market time and judgment for profit.
- Latency Arbitrage: A method where traders profit from faster transmission of information to trade before others. Brokers at co-location facilities were able to trade microseconds ahead of slower transmission of most of the market.
- Fiduciary Duty: NSE officials were duty-bound to perform their duties for the best advantage of the public and investors. Enabling such discriminatory access and failure to disclose same was a breach of their legal obligation.
- Section 11 of the SEBI Act: This provision gives SEBI the authority to act in the interest of investors and regulate the market. It was invoked in the 2019 order penalizing the NSE.
- Disgorgement: A legal mechanism where parties must return illicit earnings. SEBI directed NSE to disgorge ₹624.89 crore, a sum derived from advantages granted to brokers.
- Public Servant under PCA, 1988: Though NSE officers were not technically government employees, the CBI classified them as public servants due to their position’s public importance, bringing them under the Prevention of Corruption Act’s scope.
- IT Act Sections 43 & 66: These were invoked for unauthorized access to network systems.
The Proof
The entire scam came to public attention in 2015 after an anonymous whistleblower reportedly wrote to SEBI and the Prime Minister’s Office. According to the complaint, certain insiders at the NSE had allegedly helped firms like OPG Securities gain special access to live market data before it reached others. It was said that this advantage, even if lasting only milliseconds, gave these brokers the upper hand in a market where speed could mean everything.
News reports later suggested that these brokers had managed to log in to trading servers ahead of everyone else. This gave them a head start on trades and, over time, resulted in massive profits. Analysts explained that the way NSE had set up its system allowed this—because it relied on a sequential data access method, something many believed went against global standards.
Observers noted that SEBI had reportedly received the whistleblower’s letter but took nearly two years to act. By then, serious damage was believed to have already been done.
When SEBI finally investigated in 2019, it reportedly found that the exchange had not followed basic principles of neutrality and equal access. This allowed certain players to cut ahead in the line, unfairly benefitting from a system meant to treat all participants equally.
Eventually, criminal agencies got involved. It was widely reported that the CBI arrested two senior NSE officials—former CEO Chitra Ramkrishna and the then Group Operating Officer Anand Subramanian. They were accused of abuse of power and conspiring to manipulate systems in favor of a select few.
These developments triggered a long chain of legal proceedings. SEBI reportedly exercised its authority to demand that the NSE return money it had earned during the period. While the Securities Appellate Tribunal (SAT) later made some changes to SEBI’s decision, it still recognized that something had gone wrong. At the same time, the CBI reportedly pursued corruption charges, while provisions under the Information Technology Act were invoked to address misuse of the trading infrastructure.
In 2021, even the Madras High Court reportedly stepped in, asking for full disclosure and calling for greater accountability from everyone involved.
Case Laws and Statutory Provisions
- SEBI Act, 1992 – Section 11: Used to impose penalties on the NSE and to initiate disgorgement proceedings for ill-gotten gains.
- Prevention of Corruption Act, 1988: Invoked by the CBI in filing charges against NSE’s top executives for abusing official positions.
- Information Technology Act, 2000: Applied to examine unauthorized access and exploitation of NSE’s digital architecture.
- SAT Orders (2022–2024): Partially reversed financial penalties while acknowledging breaches of fair trading norms (CBCL NLIU Analysis).
- Madras High Court PIL: Highlighted lack of transparency in SEBI’s probe and demanded judicial oversight (BusinessLine, 2021).
