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Letters from a whistle-blower to SEBI on NSE rot

In separate letters to Securities and Exchange Board of India, the National Stock Exchange whistle-blower in the co-location scam provides details of "how the NSE's top brass, in connivance with some bureaucrats in the then Finance Ministry and powerful ministers in the UPA government" manipulated and milked the system. The whistle-blower, who is now in the US says, enormity of the scandal is so huge that its parallel can be drawn from the modus operandi of global pharmaceutical giants who have the entire system under their clutches.

About the torture he suffered as a result of exposing the scam, this is what the whistle-blower writes: I have suffered for being an insider and having knowledge of the rot in NSE's underbelly. After having tendered my resignation, I was forced to serve an unheard of 18-month notice period. As I was constantly harassed and threatened, to protect my family and their future, I had to send them abroad while I served the notice period. After an ordeal of 18 months, I was finally released from the cage that was under the control of the HFT mafia and joined my family in the US.

Excerpts from the whistle-blower's letters to SEBI:

EVERYDAY GAIN:The entire coterie involved in the NSE colocation scandal had its tentacles in each level of the financial market ecosystem influencing and overriding regulatory authority to benefit themselves at the cost of millions of investors.

While, at one hand, the whole market has incurred loss, at the other hand High Frequency Trading - HFT MAFIAs - have made illegal gains of at least Rs 50,000 cr in the melee.

In the part A, I am going to showcase few strategies and there are many more. Blinded by the greed for their own benefit, these perpetrators of the colocation scandal poisoned the system, similar to how drug mafia leaches out money by pumping narcotics in the veins of an otherwise robust healthy body. In a manner similar to how the narcotics spreads its venom in drug addicts gradually over a period of time then compel the addict to keep on paying them for perpetual time and sucks the blood in form of profit, these perpetrators of the scandal have corrupted the system from 2010 to the time that the colocation scandal surfaced, pocketing an illegal gain of an estimated Rs 50 cr - Rs 100 crore a day.

LIKE A CASINO: In part B, I will expose NSE's ill-intended request for a settlement through consent, which should not be allowed as NSE itself is a first line regulator. Positions of these perpetrators of colocation scandal at NSE had been similar to the owner of a casino is a player too, who knows the exposures and bets of every other player.

Despite being repeatedly threatened, I feel duty-bound to disclose these information to you in my bid to initiate strongest possible exemplary actions against these D-Gang of Indian capital markets.

PART A

There are multiple ways to calculate losses because NSE officials acted in concert with the brokers. Two broad categories are as follows

- Based on trades; the same can be measured from payout details

- Based on Orders; by running the exchange in simulator mode and decide settlement positions

* PROFITS

As the market has become more technical, it may be difficult to calculate the impact of a scandal easily as there are millions of data points. SEBI can start checking F&O payout amounts for those entities that enjoyed privileged access by NSE insiders. Already it is reported that OPG Securities profit in one of those years surged by almost 200%. But the major chunk of profit was made by FPI's outside India through the order book that OPG exported. OPG used to construct the full order book and send to FPIs at around 6 am with full access to the information so that SGX Nifty can be manipulated when NSE opens at 9.15 am taking the cue from SGX, which is fully manipulated with very low market depth.

* PRIVILEGED ACCESS:

Let me showcase a few strategies that can make fat risk free money out of NSE Co-location with a privileged access. NSE has a formal strategy approval process in place, but provisions to make money with different strategies are kept open by exchange for the said purpose. For the purpose of approval, many Algorithmic Trading Prop Desk or brokers used to take approvals of standard strategy used in the market and will be offered by technology vendors such as Omnesys (NSE had strong investment in this during the scandal period), GreekSoft, etc. To avoid rejections of Algo Strategy approval from NSE and for faster implementations at NSE Co-location, brokers used to take approval of vendor provided algorithms and then ran strategies of their choice which could exploit the markets and not the strategies that were approved. Such favours were extended to few selected brokers. Exchange knew that they would never catch anyone if brokers decided to run their secret strategy of their choice for which approval was never taken. NSE's system was designed in a way that money laundering was encouraged and was rampant.

* ALGO TRADERS

Decisions making of non-privileged members/ investor go wrong because their decision making was based on wrong price points only. By the time they see price on their screen, TBT data would have changed more than 10 times. The algo traders who were given faster access by NSE had huge advantage over them.

PART B

NSE's attempt to cover up like in past through consent mechanism

* BENEFICIARIES

NSE as an institute needs to be saved post a thorough acidic clean-up but individuals in position from top to bottom, that it the full chain - political god father to bureaucrats, SEBI officials, NSE employees and top brass, and beneficiaries and partners in crime including Omnesys, Infotek, Chanakya, FIIs, brokers and manipulating FPIs - have to face criminal charges and civil liabilities and pay back the illegal gains.

* It is a fact that all 14 people did not give same versions of the scam that took place when SEBI interrogated them. Some of them were isolated and threatened by NSE to toe the official lines; else, they were told that legal help will not be provided by NSE.

* INSIDERS

During the NSE's co-location scandal insiders were thickly involved and NSE's inside architecture, hardware details were shared with select members. Such information was never in public domain for other members to equally exploit.

* Members were allowed to front run the entire market as they were consistently logging ahead of others as well as they were accessing traffic free servers. Both arrangements tantamount to clear front running and were thus having a clear market-wide impact and it is a market-wide fraud. This affected the interests of retail and small investors among others.

* PUNISHMENT THROUGH CONSENT

This co-location case is unique because it involves fraud on the part of the first front line regulator which NSE is. The entire consent mechanism by SEBI was possibly written without envisaging the scenario that a frontline regulator like NSE can actually turn to seek punishment through consent!

* PROTECTING CORRUPT :

It is even more surprising that exchange is spending money to protect corrupt people by burying its reserve and surplus which is nothing but money collected as fees etc from member brokers and investors. SEBI must stop this and issue a stern warning from spoiling investors' money.

NSE CO-LOCATION SCANDAL: MOTHER-OF-ALL-FRAUDS

In continuation of my earlier two letters to you, I am hereby summing up the entire information on the NSE co-location scandal in a succinct and effective manner so that it may be easier to understand and unravel.

* LOSS TO INVESTORS

NSE's criminal conspiracy has caused huge loss to millions of investors, to all the brokers, except those who benefited out of the co-location, all the listed companies and the nation as a whole. To put in simple terms, if A has to receive Rs 5 from B and if B does not pay, then it is a very open and simple assessment of fraud. But, assume that if A were to receive Rs 100 but has received only Rs 95 without him knowing that he has to receive Rs 100, then in all genuinity, the brokers would have equal access and opportunity for Rs 5. Due to favourable access, entities like OPG Securities and 14 other entities benefitted instead of other brokers and their clients. In a nutshell, in the co-location scandal, very few-- not even in double digit- have fraudulently benefitted against whole market every day for at least more than five years which had a trading volume of roughly Rs 2-3 lakh crore per day. So, here, anyone can imagine the quantum of gain made by these few entities in the co-location scandal.

* WHISTLE-BLOWER'S SECOND LETTER

Whistle-blower (Alpha Grep ex-employee) from Singapore said in his second letter that if the regulator or its auditor does a serious calculation of the daily turnover of Rs 3 lakh crore at NSE, 30-40% of it is from algo and program trading and 70% is from Nifty's Futures and Options. And over a period of more than five years, the full order book, with tick-by-tick, was available for manipulation and to conspire hours earlier, considering that when Singapore market opens, if I am not mistaken, at 6.30am Indian time, while Indian market begins operation at 9.30am, which is influenced by Singapore markets where only FIIs and very few others have access. The fraud will be minimum to the north of Rs 50,000 crore.

* LOSS TO 12 LAKH INVESTORS

In case of NSDL IPO scam, IPS officer Sanjay Pandey single-handedly calculated the loss caused to 12 lakh investors versus the benefit to a few. Any penalty that may be levied by a regulator must be over and above the disgorgement from the beneficiary who received the money, and taking stringent actions under IPC sections such as Prevention of Corruption Act for this mother-of-all frauds.

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