EY completes forensic audit report on NSE India co-location issue

16 November 2017 Authored by Consultancy.in

In the latest development of the co-location case that the National Stock Exchange (NSE) of India is currently dealing with, audit and advisory firm EY has prepared a forensic audit report for the NSE to submit to the Securities and Exchange Board of India (SEBI).
The co-location controversy unfolded in the Indian trade market between 2012 and 2014. It came to light that certain brokers were colluding with NSE officials to gain preferential access to the NSE server through a placement manipulation at co-location facilities. In essence, some brokers were allowed to obtain rack space in closer proximity to the exchange servers than others.
The proximity allowed select brokers to access the ‘dark-fibre’ as well as to login to the exchange database a split-second faster than others. According to reports, a split-second can make a difference of millions in the world of stock-brokerage, and a handful of brokers therefore accumulated substantial profits over the two-year period.
In August this year, SEBI announced the appointment of Big Four rival firms Deloitte and EY to conduct forensic audits on the matter. The announcement followed comments from the Chairman of SEBI, Ajay Tyagi, who said “SEBI has initiated a comprehensive investigation to examine connivance/collusion of the NSE’s employees with stockbrokers and any other entity to facilitate preferential access/treatment from the NSE.”Indian National Stock ExchangeThe reason for appointing both firms was stated as an attempt to expedite the process. This will suit the NSE, which is keen to proceed with its plans of going public that have been repeatedly delayed due to this case. Rival exchange BSE already rolled out their IPO in January this year. 

While Deloitte was charged with the audit of the NSE’s equity derivatives platform, EY was given the task of auditing the cash markets, currency derivative and interest-rate futures platforms. Deloitte released its reports in recent months, which revealed that the systems at co-location facilities were not only prone to a great degree of manipulation, but had been subject to the same, resulting in large abnormal profits being made by a handful of brokers. 
Now, EY has prepared its audit report, which has been submitted by the NSE to SEBI. The report is accompanied by a study conducted by the Indian School of Business on any abnormal profits that were made within the exchange, The findings of the study, which are currently under review by SEBI, were not made public.
The audit is a significant project for EY India’s Fraud Investigation and Dispute services, which are undergoing rapid expansion in the region, having recently also expanded into Bangladesh.