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The National Stock Exchange (NSE) states that the reply by journalists Debashis Basu and Sucheta Dalal do not provide conclusive proof of wrongdoing in the exchange, reports the Business Standard. This was NSE’s reply to the affidavit by journalists working for Moneylife in its defamation suit in the Bombay High Court

Previously, the NSE had filed a Rs 100 crore defamation case against Moneylife magazine in July, a month after Moneylife published an article on algorithmic trading based on a whistleblower’s report. The report detailed how certain companies, which were registered for high-frequency trading (HFT) were profiting illegally with the help of the exchange’s insiders.

Note that, the same month, the Bombay High Court said that the National Stock Exchange (NSE) cannot use defamation to gag the press. The court specifically asked the NSE how it could treat it as a defamation case when the agency had not responded to queries made by the press prior to publishing.

HFT and how it works: HFT is a way of algorithmic trading where automated tools rapidly trade securities. High frequency traders trade on very small profit margins in high volumes in fractions of seconds. Overall, the faster the trader gets the prices, the more likely they are to make a better profit. Usually, this boils down to the latency to the server and the efficiency of the trading algorithm. Getting the info even a few milliseconds earlier than anyone else, can result in massive profits.

In this case, the whistleblower, whose entire letter can be found here (pdf), accused NSE of letting certain agencies connect to its server with lower latencies. The companies apparently exploited NSE’s traffic queue handling with the help of certain insiders, while remaining under the radar due to asynchronous clocks across NSE’s servers. The whistleblower alleged that in one case, an unnamed agency made profits upward of Rs 2 crore per month, or around Rs 100 crore over three years.

Moneylife received this information through snail mail from Singapore, in a letter addressed to the DGM of SEBI, which was cc’d to Moneylife. The document was received in January, post which the press agency wrote to the SEBI Chairman, the Chairman of the NSE and the MD of NSE, asking if they had acted on the document. The post and the letter were published on the 19th of June, after not receiving a response. This is how the events occurred, as detailed by the whistleblower in his letter:

– The NSE initially used a limited 2 mbps leased line to multicast its price streams to everyone. Due to the large size of price information, new order price information coming into the exchange was however, distributed in TCP/IP mode, basically one by one to each trader. This basically let the person who got the price information first process it before others could get it.

– This process was started by the agency in 2010, while traders could write programs for it using NSE’s APIs. At this point, the whistleblower mentions that the system was overloaded as it was not built for high traffic, and since the price information was available sequentially, traders only needed to connect first to get the price information first throughout the day. Usually, stock exchanges use UDP protocol to disseminate information as a broadcast to everyone, rather than sequentially to each person, something NSE did not bother to do.

– Another complication was caused by the fact that the NSE had limited servers with unequal loads. This caused a severe delay for the last person to connect (getting info from a heavily loaded server), as compared to the first trader on the least burdened server.

– This meant that the latency with which the last user connected to on the most heavily loaded server, would vary greatly against the first trader on the least over loaded machine.

– Working with some insider NSE staff, certain institutions would get access ahead of time by switching on the servers early and get priority access to servers that were the least crowded.

– NSE servers did not timesync across all exchange servers, which meant that no one could prove latency numbers, as every computer had its own timestamp.

– A load balancer was introduced by the agency in 2012 to automatically assign traders to servers and evenly distribute the load, a measure which should have stopped the hack from happening.

– However, once again with insider help, these certain institutions started connecting to the backup servers that had zero traffic, as they were only for emergencies. This ensured that these agencies continued to get quicker information.

MediaNama’s take: Such an attempt to silence speech is referred to as libel chill, and India’s painstakingly slow and punishing judicial process makes it all the more likely that institutions would rather take down articles than engage in a legal battle. We’ve seen recent manifestations of libel chill in the publishing world, in case of books like The Descent of Air India, The Hindus and The Untold Story, where publishers have withdrawn and/or pulped books because of court cases. More recently, Flipkart sent a cypersquatting and trademark violation notice to a journalist running a poll, forcing him to take down his website. There’s also no telling how many stories have been taken off websites, without anyone noticing.

However, in this case the Bombay High court seems to be asking the right questions. We hope the court will eventually rule in favour of the publication to publish the story. Another underlying issue seems to be how casually the NSE is taking the reports of trading manipulation. Instead of clearing the very legit questions raised in the media, the agency felt it necessary to go to court and gag the media instead. Flaring up and trying to gag the issue down only makes the agency look more guilty of actively participating in such actions.

Also read

– We received a Right to be Forgotten request from an Indian user

– Flipkart believes online poll infringed its trademark, but won’t say how

Image source: Flickr user Rakesh