The dark (fibre) side of NSE

The controversy:

Securities & Exchange Board of India (SEBI) suspects that the National Stock Exchange (NSE) officials have allowed the non-internet service providers (ISPs) to lay dark fibres in the NSE premises to service their trading members. The respective members are said to have terminated the links through non-ISPs which is legally allowed only through approved ISPs.

What is a Dark fibre?

Dark fibre is an unused fibre optic cable laid by companies for future needs,  in order to avoid costs of having to do it again and again. The network is the privately operated optical fibre network, directly run by the operator over dark fibre leased or purchased from another supplier, rather than by purchasing bandwidth or leased line capacity.

The case:

The investigation kicked off after the Singapore based company informed SEBI and Finance Ministry about the conspiracy between NSE and its members. The letter stated that NSE had allowed few of its members to illegally benefit from prioritised access through those dark fibres.

The illegal and prioritised access was given to the select few, over others to deal in multi-legged option orders. Such access usually gives traders an advantage of 10-15 milliseconds ahead of the normal traders which is quite momentous in High-Frequency Tradings (HFTs).

SEBI’s Intervention:

Similar case was filed last year against NSE wherein it had provided few of its members an access through co-location. The case was offended by the NSE.

In the recent controversy, SEBI has asked NSE to provide the required inputs under the Right to Information (RTI).

SEBI is already looking forward to regulate algorithm trading and HFTs. According to the SEBI issued guidelines, stock brokers and traders would have system audits once in six months to ensure the fulfillment of SEBI regulations.

Secondly, SEBI would put restrictions on determining the resting period and fixing a benchmark for order-to-order ratio for algorithm trading. The said regulations are likely to check unnecessary price volatility and price manipulation and thereby provide equal chance to algo and non-algo traders.