Book Extract

Market Mafia

the whistleblower described the contours of a ‘Preferential Access Scam’, through the use of COLO grid and TBT data that was brewing at the NSE for the past few years. Suddenly, the exchange became a gritty cauldron and what began to unfold was the tale of SEBI’s prolonged apathy to the happenings inside the NSE – a.k.a. the CB Bhave galore. Palak Shah
Enter Vol.14 ISSUE 7-9 DECEMBER 2020

The financial community saw a glimmer of hope after the Congress-led government at the centre was dislodged in a humiliating election defeat by the BJP in 2014. Consequently, (P) Chidambaram’s outer from the seat of power was reason enough for the beleaguered few to take on the unscrupulous element at NSE’s COLO trading farm. The elite at the exchange started to witness sudden, sharp vicissitudes of luck since losing their political patronage and it caused considerable anxiety in the ranks.

In the midst of this, somewhere in January 2015, SEBI received a letter from Singapore that was written by a whistleblower under the pseudonym – Ken Fong. The elaborately detailed letter was enough to set the cat among the pigeons.

Ken Fong started his letter with a straight point, “I wish to draw your attention to a sophisticated fraud at NSE’s co-location (COLO). The market manipulation I’, referring to has been occurring by enabling certain vested brokers to get price information ahead of the rest of the market and thus enabling them to front-run. The most shocking aspect is that when the matter came to the knowledge of NSE management, they chose to hush it up rather than come out in the open against the same.”

In the eight-page letter, the whistleblower described the contours of a ‘Preferential Access Scam’, through the use of COLO grid and TBT data that was brewing at the NSE for the past few years. Suddenly, the exchange became a gritty cauldron and what began to unfold was the tale of SEBI’s prolonged apathy to the happenings inside the NSE – a.k.a. the CB Bhave galore.

The informer told SEBI that certain brokers, who had ooked the server space in NSE’s COLO farm got favourable treatment in “first connection” to the exchange data dissemination enine. They would get market data a few seconds in advance than others even in the COLO farm and were able to hit and run trades ahead of anybody else. A crucial part of the letter was where it gave a low-down on how the COLO grid at NSE was inherently built to be exploited and that the echange staff (themselves) ripped brokers about the loopholes in the system.

The idea of COLO itself had created an Orwellian state where brokers who were within the farm were higher among the equals as the whistleblower’s revelations now revealed that the entire infrastructure was in fact defective.


Ajay Shah and Susan Thomas, the two Mumbai-based professors who were celebrities in the realm of capital market research, spun a flourishing family enterprise at the NSE. Among other perks, their chicanery as exchange insiders exposed them to the real goldmine – Data, which is most vital in coding of Algo trading software.

“You have to swear everyone to silence about the fact that the data we are getting out of NSE is going into Algorithmic trading work. It would be a severe problem if this fact comes to light, since NSE has not even given the data to anyone else,” Ajay wrote in an email to Susan’s sister Sunita Thomas, who was a dealer of Algo software. HFT driven Algos were just starting to gain supremacy in the Indian stock markets at the beginning of 2008.

Sunita conducted her business through Infotech Financials, a company that emerged as a mere front for the professors. Coincidentally, she was also the wife of Suprabhat Lala, a top rung NSE executive. Data, research, and Algo software all became an in-house production job for Ajay and Susan.

Algos are computer coded trading strategies that can react to events – every price tick in an event. HFT machines are electronic trading bots that give these monster brains the speed of execution as they spit automated orders faster than the latency of light. Before the human mind can assess and decide whether it wants to partake in a trade, the HFT Algos have already executed it and made a killing.

Speed of trading and advanced information is a Mantra for winners in the stock market – HFT, Algos and data its form. Technology required that brokers put up their bots as close to n echange trade engine as possible for them to be fast at the play. Since every bot trader wanted to get in close proximity pf NSE, they started locaing near its headquarters in Mumbai’s plush Bandra-Kurla Complex, ironically a stone’s throw from SEBI’s headquarters.

In 2010, the exchange set up a high-tech data hub within its sprawling office building, and for the first time, brokers were invited to trade from inside its premises by the NSE. The exchange offered them space in the data centre that also housed the master order matching engines in the vicinity. Armed with tech tools, and an unquenched greed for profit, it was the closest a broker could get to NSE’s engine that tirelessly matched buy-and-sell orders in a jiffy.

This was an incredible development since those who were searching to locate closely around NSE could now actually set up their bots inside the exchange. The heat had turned up a notch higher. NSE’s heart was now the broker’s server farm, termed as Co-Location (COLO), a highly disruptive force. Algo bots became lethal when the machines that drove them were placed cheek-by-jaw with NSE’s master engine.


The catch was that NSE’s COLO area staff provided server and login time to brokers secretly on many occasions. The staff even fixed the time at which NSE’s TBT would be started in the absence of any documented policies.

“For some strange operational reasons, NSE did not start its TBT servers at a fixed time every day. First, it could not physically start all TBT servers concurrently and, unlike the market, which opens at the same time for all persons, the TBT connection was established before the market opened, typically one hour before, but the time was not fixed. This was the first of the many steps, which cemeneted the bond between NSE’s data centre staff and OPG. Every day, he (OPG promoter Sanjay Gupta) would be privy to the information as to which server would be started at what time so that he would be the first to connect and enjoy the advantage,” the whistleblower revealed in his extensive letter.

“Emails reviewed suggested certain members may have received advice from someone within the exchange that there was an advantage in receiving market feeds on early login to TBT servers. We also found that in various instances, statements given to us by the NSE team conflicted with emails that we came across in the course of our review,” Delotte made its revelations.

There were several emails found during the probe where brokers were inquiring about the advantages of early login with COLO staff much before everyone else could come in.

“During our discussion with members of the NSE IT team, we were given to understand that the TBT application was manually started around 7.30 am on trading days using a script written on Epsilon server. A broker could only connect, once the application to the server was started by the PSM (Product Support Team) member,” Deloitte said. The person responsible for starting the server manually should be able to say who asked him to follow a certain time and passed that information to the brokers.


In simple words, NSE servers could have had different time clock. What was 7 am in one server could very well have been 7.02 am for another. Only the insiders knew exactly which server was ahead. The brokers who logged in early got the TBT data first throughout the day and could hit their trades ahead of others. It was this early login when seen with faulty TCP/IP infrastructure became a tool for manipulation.

If one considers the intricate planning behind such a complex plot, Harshad Mehta and Ketan Parekh really look like Lilliputians. “As per your suggestion to connect to TBT servers as early as possible, we should connect to TBT servers by 7.30 am onwards and give you the feedback,” broker AB Financial Services wrote to NSE’s COLO support staff in an email. “Early TBT login will be given preference in trading feeds, we have few queries regarding the process,” said another email from IKM Investors to the COLO team. g


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