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At India’s largest bourse, crises are becoming par for course.
On Monday (July 10), the National Stock Exchange (NSE) was tripped by a technical snag in the early hours of trade. The three-hour glitch left the traders fuming. Only after three failed attempts was the NSE able to remove the glitch, but the reasons for the software meltdown remains unknown. The finance ministry has now sought a report on the matter.
In a letter, NSE chairman Ashok Chawla termed the incident a “black swan,” an unexpected event with major consequences. “Yesterday’s technical glitch is, proverbially speaking, one more straw on the camel’s back… it unfortunately puts the NSE in the spotlight for the wrong reasons,” Chawla said.
It wasn’t always like this. Incorporated in 1992, the NSE was founded to break the monopoly of the Bombay Stock Exchange (BSE), India’s oldest stock market, which began operation in 1875. The plan worked. Within just one year, the NSE managed to leave its rival far behind in terms of the volume of stocks traded. Backed by better technology and products, the upstart has maintained its lead ever since.
The NSE enjoys the lion’s share of India’s capital markets with control of 85% of equity cash trading, 94% of equity derivatives, and 59% of currency derivatives in 2016. It was also the world’s fourth-largest-exchange by equity trading volume in 2015, according to the World Federation of Exchanges.
Monday’s glitch, however, isn’t the first incident to raise doubts over its functioning. In the last few months, the NSE has been making headlines for all the wrong reasons. First, a scandal erupted over the NSE’s alleged involvement in giving undue advantage to select brokers. This was followed by a leadership crisis when two top officials quit in the last six months. Now, the unexplained software glitch.
The timing couldn’t have been worse. The NSE is preparing for a debut on the stock market, with an initial public offering (IPO) that could be worth Rs10,000 crore. That would make it the biggest IPO to hit the Indian stock market since Coal India raised over Rs15,000 crore in 2010.
Whiff of a scandal
The NSE’s recent string of crises began in 2015, when a whistle-blower wrote to India’s market regulator, the Securities and Exchange Board of India (SEBI). Ken Fong—the whistle-blower is known only by this pseudonym—alleged that the exchange was giving early server access to a few select brokers.
Several stock exchanges have a co-location programme for brokers that allows faster trading. For a fee, these brokers’ computers are placed in the same premises, close to the exchange’s servers. The resultant faster transmission of data lets these brokers access prices and stock movements earlier than others, allowing them to place faster orders for stocks. However, some brokers within the NSE’s co-location programme were getting data earlier than others on it. With a few milliseconds’ headstart, they were reportedly booking daily profits of upto Rs2 crore.
Initially, the NSE denied the allegations.
However, in December 2016, in the draft red herring prospectus filed for its IPO, the exchange mentioned the irregularities as pointed out in a forensic audit. Deloitte, which did the audit, had confirmed these instances of unfair access. However, the NSE said the irregularities mentioned in the report were solely Deloitte’s view.
After the Deloitte reports were made public, the SEBI decided to hold probe. Last month, it pulled up the NSE for not co-operating with the investigations. Alongside, the Reserve Bank of India has stepped in with an investigation, and the NSE, too, launched its own internal probe, this time conducted by consulting and management firm EY. In another letter to the SEBI in February this year, the whistle-blower said the problem of preferential access still remains, although the time advantage has been reduced.
The NSE still has lot of explaining to do, especially regarding the possibility of employee collusion.
Meanwhile, some key management personnel have moved out. Last December, Chitra Ramkrishna, the managing director & CEO of the NSE, put in her papers, a year before her term ended. Six months later, Ravi Narain, a board member and the CEO at the time when the alleged irregularities occurred, also quit. Both Ramkrishna and Narain were among the NSE’s founding members.
Troubles and new beginnings
Now the software glitch has knocked down the stock exchange’s reputation further.
However, technical problems at stock exchanges are not a rarity. This month, New York’s Nasdaq and the Indonesia Stock Exchange grappled with similar issues. But what sets the NSE apart is the lack of clear communication.
“Investors who didn’t get any information till mid-session were left confused,” Anita Gandhi, director at Arihant Capital, told Bloomberg. “And those traders who have only the NSE feed and not the Bombay Stock Exchange feed also suffered. The exchange’s reputation got hurt in the process.”
In fact, shoddy communication has been a pressing issue for months now.
“The technical issue has become one more reason to find fault with NSE. But to give the devil its due, these are isolated incidences. However, one thing is clear that NSE lacks communication (skills),” said Arun Kejriwal, founder, Kejriwal Research, an advisory firm. “They continue to behave like an ostrich that puts its head down in the sand and pretends there is no storm. This needs to change.”
But analysts are convinced that the NSE can bounce back. “The onus is on the new management,” said G Chokkalingam, founder, Equinomics Research & Advisory.
So, all eyes are on Vikram Limaye, the NSE’s new managing director & CEO, who is likely to take over the reigns from July 17.
He must ensure that the probes are completed quickly, the issue resolved, and the delayed IPO takes off smoothly. Limaye also needs to take evasive action to restore the NSE’s image. “There have certainly been problems but now the new managing director needs to put that behind and fix the problems first. They need to start on a clean slate and satisfy the investors and shareholders that all these issues are unlikely to recur. They do need a clean break from the past,” said U R Bhat, managing director, Dalton Capital, an investment management firm.
“If they can efficiently solve the problems then the market will be gladly willing to forget it,” added Chokkalingam.