In a massive development, former National Stock Exchange (NSE) CEO Chitra Ramkrishna was arrested by the CBI from Delhi late Sunday evening in connection with the co-location scam case. The arrest of Ex NSE CEO Chitra Ramkrishna came after Delhi's Rouse Avenue Court on Saturday denied her anticipatory bail. Following her arrest, Chitra underwent a medical examination and later she was lodged in a lockup at the CBI headquarters in New Delhi. The report suggests that the CBI had interrogated Ramakrishna for three consecutive days and also raided her residence and office.
Not only this, but the Central probing agency also took the help of a senior psychologist of the Central Forensic Science Laboratory who questioned Chitra on the co-location case. However, it was reported that Chitra was evasive during the interrogation and therefore CBI was left with no choice but to arrest her. Now, those who are wondering what is Co-location scam case and why it is a big thing for those who are involved in buying and trading stocks.
To know what is Co-location scam case rad further:
What is co-location scam case?
Although the controversy came into limelight in 2015 through whistelblower's mail, the advent of co-location scam case goes to the year 2009. In August 2009, the NSE offered co-location facility to stock brokers who were willing to pay extra. In the co-location facility, the stock brokers could place their IT servers, right next to NSE's servers by paying a particular amount of fee. The start of co-location facility meant that the prices broadcast by NSE's trading system would first reach the brokers whose servers were closest to NSE's servers.
Those who are wondering whether co-location facility of the NSE in 2009 was illegal. The answer is no. Although the co-location facility was unfair but it was not illegal at all. The facility was unfair for those brokers who could not afford to pay for co-location. The non-colocation brokers would receive the prices with a lag, and this lag would be anywhere between a few milliseconds to a second or maybe even more, depending on the physical distance from the exchange's servers. Notably, NSE introduced this facility without first putting up a discussion paper on the subject with SEBI, which is usually the procedure.
Notably, many whistleblower emails were sent to SEBI in 2015 and 2016 regarding alleged abuse of the exchange's co-location facility to make gains by getting early access to the stock market.
How the loopholes in co-location facility was exploited by brokers?
As per the firstpost report, in December 2009, NSE started offering its colocation members tick by tick (TBT) data on the price feed. As a result, TBT would allow a broker to see every single buy and sell order sitting in the system. Say a stock is quoting at Rs 100. A regular broker can see the best buy and best sell orders from Rs 100 to Rs 98. However, brokers with co-location facility can have a watch on pending order, and he could see it granularly making them. Therefore, knowledge of the depth of the order book can be misused to manipulate prices, as it is clear at what price points the maximum buyers and sellers are. And that's what happened actually.
For instance, suppose you are standing in a queue of an airport and you are trying to figure out which queue will be first cleared. What will happen if you know beforehand which queue will be first cleared? Similarly, with the co-location facility this is what some brokers were able to do.
How former NSE CEO Chitra Ramkrishna's name popped out in Co-location scame case?
The irregularities in the colocation facility happened between 2010 and 2015. Chitra was Deputy CEO during that period and later succeeded Ravi Narain as MD and CEO and was in office until December 2016 before being forced out. SEBI has claimed in a 190-page report that Chitra Ramkrishna and Anand Subramanian (ex-NSE group operating officer (GOO)) ran a money-making scheme during their stint at NSE, alleging that Anand Subramanian's appointment as NSE's CSO was influenced by emails from a 'yogi' dwelling in the Himalayan region in 2013, along with a compensation of Rs 1.3 crores. SEBI has penalised Chitra for leaking sensitive information on NSE’s five-year financial projections. Ramkrishna has been accused of passing internal information of NSE to the guru she referred to as 'Himalayan Baba'. SEBI has penalised Ramkrishna for Rs 3 crores and Rs 2 crore each on NSE, Subramanian, Narain. It is pertinent to mention here that SEBI is yet to calculate the extent and amount of scam which was done under the co-location facility.