 "NSE breaks silence on whistle-blower complaint")
The exchange told Business Standard it had responded to a query from the Securities and Exchange Board of India (Sebi), which had sought comments on the whistle-blower account. It also provided the rationale behind certain systems in the collocation framework that were questioned by the whistle-blower.
"The NSE always replies to queries by regulators. In this matter also, we have kept the regulator posted," the exchange spokesperson said in an e-mail response on September 9, the day on which the Bombay High Court dismissed the bourse's notice of motion against Money Life magazine.
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The judge had reprimanded the NSE for not responding to the magazine's queries.
The spokesperson did not answer questions on whether there had been any follow-up queries from Sebi after NSE sent its responses.
On September 4, Business Standard had sent a detailed questionnaire seeking the bourse's response, after learning that Sebi had sought comments of the exchange in the matter. Nearly a month after receiving the whistle-blower's letter in January, Sebi had forwarded it to the exchange, seeking its comments. The exchange furnished its detailed response to Sebi in April.
A questionnaire to the Sebi spokesperson on whether it had formed an opinion on the whistle-blower's allegations and whether it had initiated a probe into the matter remained unanswered.
One of the key allegations of the whistle-blower, who had identified himself as a Singapore-based professional, was that a Delhi-based member on the NSE was able to remain ahead of others by linking to servers and getting access to least crowded servers.
He alleged a facility common in global bourses was missing from NSE's collocation systems. "There is globally a practice of time sync across all exchange servers and all servers at the collocation sync themselves with the exchange clock (down to the millisecond)." The absence of this facility, he alleged, meant "no one could prove latency numbers as every computer had its own timestamp".
This allowed the NSE member to get away with unfair advantages undetected in 2011 and 2012, the whistle-blower pointed out.
On the time sync issue, the NSE spokesperson said, "The NSE provides time sync using the industry standard NTP (network time protocol) . The other possible protocol, PTP (precision time protocol), may entail a technology change cost as hardware would require upgradation at several levels, including members. Some studies indicate that high upgrade costs may not be practical. Hence, it is not yet implemented."
The whistle-blower had referred to the absence of the facility of multicast for tick-by-tick price feeds in the initial days of collocation as another flaw. Multicast is a group communication where information is addressed to destination computers simultaneously. The exchange systems were using TCP/IP to send feed to each computer one-by-one.
"Multicast is inherently unreliable and investments need to be made by members (among others), in handling errors and using alternate recovery feeds to ensure reliability," NSE said.
The exchange added some members might not be keen on upgrades because of related incremental implementation costs. "Even today, after two years, many members continue to use TCP/IP since it is simpler to implement and more reliable. Globally, too, exchanges continue to offer TCP/IP as an alternative," the spokesperson added.
The whistle-blower had talked about the retirement of NSE's then chief technology officer, Ravi Apte, and subsequent changes to the system. The letter had suggested the churn in the exchange's data centre as an indication of a possible cover-up.
"The change of people at that point has nothing to do with the allegation. Redeployment of people from one department to another and attrition are common. As an exchange, we provide equal facilities for all our members. Data centre people do not have access to either the applications or the ability to implement any of the changes," the NSE spokesperson said.
The bourse declined to provide details of trading volumes of the alleged beneficiary. "The NSE restrains itself from commenting on any particular member and its level of engagement with us, unless of course the same is sought by a regulator." It also said "as a matter of fact, it is difficult to ascertain the identity of any whistle-blower".