Unknown date Unknown author

Stock market ma a and NSE scandal

Excerpts from The Market Ma a by Palak Shah, made
exclusively available to The Sunday Guardian.

The Market Ma a by long-time stock market watcher Palak Shah is an account

of the inner workings in India’s stock exchange ecosystem. Insider
manipulation, masterminded by a senior minister in the previous government,
resulted in distortions that were obvious and provable but remained
uncorrected. The Securities and Exchange Board of India (SEBI), whose role is
to represent the shareholders, often failed to act as the watchdog, with little
consequence to those responsible.
This isn’t your run-of-the-mill mystery. It is author Palak Shah’s “true account” of
the “Algo Trading Scandal”, “data theft” at the National Stock Exchange (NSE)
and the Multi Commodities Exchange (MCX), a narrative of how questionable
activity was institutionalised in the Indian nancial markets. A cabal of high
ying bureaucrats, stock exchange executives, SEBI o cials and stock brokers
(not to mention their high political patronage) played with the sentiments of
gullible retail investors, the book reveals. The names mentioned in the story are
not a bunch of market operators but tie-suit executives and PhD scholars, who
by the high in uence of their position and access to power played with the
sentiments of gullible retail investors.
The story of “Big Bull” Harshad Mehta belonged to an era long gone. This is the
tech age, the “new age” stock market manipulation. These are exclusive
excerpts from Palak Shah’s book.

CHAPTER 1: THE HOUSE OF CARDS

‘As the man at the helm of affairs of the premier nancial market regulatory
agency, he was expected to be more vigilant. On the contrary, Chandrashekhar
Bhasker Bhave was conveniently turning a blind eye to the subterranean
changes that the Indian stock markets were undergoing around 2008. High-
Frequency Trading (HFT) driven Algorithms (Algos)—the computer-assisted
tech tools that deftly buy and sell stocks—were altering the high-octane equity
trading game.”
“Securities and exchange Board of India (SEBI), the ‘super-cop’ responsible for
policing it, was at a nadir in following its Dharma of ensuring ‘fair market
access’ to all participants when HFT-guided Algos came into play. Bhave, the
then SEBI chairman, was apparently busy ghting his own battles.”
“As a sacred rule, no trader can have preferential access to a stock exchange
platform. And the ethics demand that no tool, order type or service can be
obtained exclusively by a few from the exchange by whatever means, even as
the rest remain forbidden from it. But technology changed everything; it turned
the stock markets into an ‘Animal Farm’. The elite few with their tech tools
became ‘more equal’ than the rest.”
“Only a few brokers who used NSE’s COLO grid knew the nuts and bolts of the
technology that was driving the markets, while the outside world remained in
pitch-darkness on the insides of the space-age like tech platform. But that
invoked no con ict from Bhave’s point of view. He allowed the most disruptive
changes including HFT driven Algos and COLO operations to seep into the
stock market trading microstructure by NSE without a deeper scrutiny. He
turned into a recluse when someone told him that NSE was sharing TBT data
exclusively.”
“Ajay Shah and Susan Thomas, the two Mumbai-based professors who were
celebrities in the realm of capital market research, had spun a ourishing family
enterprise at the NSE.”
“Bhave’s second stint at SEBI, this time as its head, became possible as the
then Finance Minister (FM) Palaniappan Chidambaram rallied his weight behind
him. The Mundu clad politician, who was also a lawyer and a graduate from
Harvard Business School, was actually a darling of the Indian stock markets
and Foreign Institutional Investors (FIIs). His cheeky, off the cuff statements
often moved Sensex and Nifty, so much so that the two benchmark share
indices of BSE and NSE had come to be known as the barometer of
Chidambaram’s announcements.”
“Before Bhave’s ouster as SEBI chief, the high-tech trading game was all set at
NSE with all advanced tech tools fully in operation. Gopal’s letter was a stark
picture of why SEBI under Bhave allowed NSE to do what it wanted to. As NSE,
the largest promoter of NSDL, had let Bhave do what he wanted to at the
depository. NSE had raised no nger at Bhave even when the SEBI probe under
Damodaran highlighted the then NSDL chief’s laxity in the fake demat accounts
scam.”
“Data shows that under Chidambaram’s watch, P-Note investments in India rose
sharply. Their holding by FIIs in stocks and derivatives combined jumped to a
colossal Rs. 3,53,484 crores (51.6 per cent of FII assets under custody) by
August 2007. In March 2004, when Chidambaram had just become the FM, the
same P-Note holding of FIIs stood at Rs. 31,875 crores (20 per cent of assets
under custody).”
“But all the emotional calls to ban P-Notes instantly fell on the deaf ears of
Chidambaram. Like a damsel with billions of dollars, P-Notes had romanticised
the FM, and he seemed to be loving it.”
“An informal clique of current and serving bureaucrats, SEBI o cials, lawyers
and corporate interests orchestrated this subversion of the due process of law.
They illegally interfered with independent SEBI adjudication, manipulated legal
opinions, suppressed and misrepresented facts and misled the SEBI Board and
Government o cials about the legality of the Orders. Law, regulations and
established precedent were violated.
“So who was so powerful to pressurise the head of India’s National Judicial
Academy? Those who could issue threats to a person with the stature of Gopal
were ‘The Market Ma a’. The power they derived from their position was the
harsh, repressive force that wielded like a ‘Rampuri’ (Indian gravity knife) to cut
people who came in their way. Threats to Gopal were splashed in leading
newspapers but those at whom ngers were being pointed at, remained silent—
an act more deadly than their violence.”

CHAPTER 2: LIFE IN THE SPEED LANE

“Ajay and Susan were captivated by Algo trading. As PhD scholars from the
University of Southern California (USC), they behaved more like modern-day
Utopians, idealistic reformers in shaping the policy narrative for NSE. Both were
hardened advocates of derivatives trading and wrote papers, blogs and
newspaper columns churning out pompous theories to showcase its traits. NSE
zealously guarded its higher volume churn in the F&O from rivals like the BSE.”
“Interestingly, the USC displays a dissertation paper submitted by Susan as
recently as June 20, 2017, which according to the university was in ‘partial
ful lment of requirement for degree of Doctor of Philosophy’. Like USC displays
a PhD certi cate for dissertation paper submitted by Ajay, no such evidence is
available for Susan even for her paper submitted in 2017 that could prove her
credentials as a PhD scholar beyond doubt. In the absence of such crucial
piece of evidence, it can be fairly concluded that there are no records to prove
that Susan, one of India’s leading researchers on stock markets and economy
since the 1990s and a senior professor at Indira Gandhi Institute of
Developmental Research (IGIDR), had a PhD degree for over ‘two decades’ as
claimed by her.”
“The entire top brass of NSE was junior to Dave at IDBI Bank, the institution
which was the key founder and the largest promoter of the exchange. Suresh
Shankar Nadkarni who became chairman of SEBI after 1992 also came from
IDBI Bank. Damodaran, who headed SEBI between 2005 and 2008 was a former
IDBI Bank chairman after he quit IAS. Even Bhave, who had worked as an
executive director at SEBI in the early 1990s was obliged to Dave, but Dave was
in turn obliged by data disseminating company CMIE, promoted by Ajay and his
family. No wonder Dave was offered CMIE’s chairmanship soon after his
retirement from SEBI.”
“With the facade of CMIE, IGIDR and the backing of Dave, Lakdawala gave Ajay
and Susan an advantage to mask the fact that Susan, who has also been a
guide to a SEBI o cial in doctorate studies, did not herself hold a PhD degree.
Blessings of Dr. Patil, NSE’s founder boss and a father gure to the staff at the
exchange but much junior to Dave in IDBI, also helped Ajay gain a foothold at
the exchange. Dave remained the chairman of CMIE and Ajay, who was never
o cially employed by NSE in any capacity, except board seats on group
companies, operated like a perfect insider in the exchange.”
“In just a year after Bhave took charge at SEBI amidst the raging controversy
over P-Notes and his own NSDL asco, India had its tryst with the ‘Flash Boys’
in 2009. It was before the world woke up to the speed link bre optic cable that
was established between Chicago and New York. The ipside of HFT and Algos
was witnessed by the world, rst during the US ash crash of May 2010. But a
similar Flash Trade incident in India, a year before the US HFT-driven crash,
passed without much ado. Unlike the US, what India witnessed was a sharp
vertical leap of main market indices that negated the panic.”
“SEBI’s investigation that followed a whistleblower letter in 2015 about Algo
trading scam at NSE revealed how Ajay got crucial data from the exchange for
years without any formality. What and how much data did NSE share with Ajay
and Susan? This is simply not traceable. SEBI too is clueless. Later, it came to
light that the couple with their family enterprise had devised a lucrative
business model of Algo trading software and even sold it to clients.”

Chapter 3: THE GREAT DATA THEFT

“Those handful people, occupying the upper echelons of NSE, were letting down
the very institution where they were employed for a long time. This cabal with
no regard for rules or fear of law were embodied in abuse of power with
impunity.”
“It was only when Enron dragged India to the International Court of Justice
(ICJ), Chidambaram relinquished his position as its legal adviser at the time
when he was made the FM by Sonia Gandhi. Ironically, the Congress-led
government in which Chidambaram virtually held the number 2 ranking,
engaged a Pakistani-origin lawyer named Khawar Qureshi to present the Indian
side at ICJ. Pakistan has the status as India’s enemy and the dimwit lawyer lost
the ICJ case in months. Harish Salve was ghting the case for India at ICJ
before UPA came to power. Nobody knows why the erudite legal expert was
replaced by an enemy country’s ine cient lawyer.”
“Interestingly, the lawyer who argued for Chidambaram in the case was another
prominent lawyer-cum-politician and BJP leader, Arun Jaitley. Both
Chidambaram and Jaitley took turns at becoming India’s successive FMs, albeit
from different political parties and governments. But the grapevine goes that
they were brothers in arms and often came to the rescue of each other. But that
is a different story.”
“Nalini was, of course, one, but controversy seemed Chidambaram’s another
wife.”
“SEBI’s ine ciency was at its peak when the regulatory o cials came across a
‘fake’ agreement between NSE, Ajay and Susan but it did not refer to the case
for a thorough criminal probe.”
“‘Data was shared with Ajay on the request of MD and DMD,’ Ravi Apte, NSE’s
chief of technology between 2007 and 2013, said during his interrogation by
SEBI. His ngers pointed towards his two bosses, Ravi Narain and Chitra
Ramkrishna. Oral orders came from the top, other NSE o cials too divulged
during audit investigations.”
“With unimpeded access, Ajay and Susan were being discreetly fed vital trade
data from NSE all through 2009, just weeks ahead of the mysterious giant leap
of Sensex and Nifty on May 18 that year, which shut down trading at the BSE
and NSE. There was so much information in the les NSE shared with Ajay that
he passed it to IFPL for improving and back-testing Chanakya’s Algo codes.”
“The blatant data breach at NSE, involving the exchange top brass, was
unparalleled in the history of stock market scams in terms of sheer planning
and scale. Ajay and Susan argued for a framework on Algo trading and even got
the data on a platter which was obviously misused by them for their
commercial gains by developing Algo trading products for sale in the securities
market.”
“What was the desperation for the country’s FM to micro-manage NSE? SEBI
went on to say NSE’s behaviour was a systemic risk. Later, a former NSE board
member told a journalist that the problem was that non-written communication
travelled much faster at the exchange and left no audit trail.”
CHAPTER 4: BATTLE OF THE BOURSES
“If Ravi Narain and Chitra Ramkrishna had a reputation of salaried executives
playing by the rule book, Shah, in contrast, came across as a ‘business-man’
with the permanent air of outsider intent on crashing into the party. After his
two successful ventures, the FTIL and MCX, Shah declared that he would be a
billionaire before he turned 40, a goal he missed narrowly.”
“NSE’s lawyer, who has managed to delay the case thus far is another Congress
party veteran, Abhishek Manu Singhvi. Once he even sought a date from the
apex court saying that he was busy in general elections.”
“With an attack on FTIL, the NSE had not only under-cut Shah’s revenue base
and the foundation of his business, but also stole ODIN’s rst-mover advantage
in COLO trading that went to Omnesys. Since NSE was the monopoly exchange,
FTIL had nowhere else to go and once volumes increased via DMA and COLO
grid, no other exchange would be able to steal a march over NSE ever. The
dominance of those who controlled NSE would also remain intact.”

CHAPTER 5: THE GOLDMINE’S CODE

“Rajeev Agarwal’s ouster from SEBI was a peculiar case that shows the power
play of the ‘bureaucratic brotherhood’ in India and the cabal that was
accustomed to arm-twisting the administrative system.”
“For the exchange industry, the Jalan rules mimicked the period called licence-
Raj in India when every industry was regulated and there was an elaborate
system of permits and licences, regulations accompanying red tape that were
required to set up and run businesses in the country.”
“Two of India’s largest exchanges suffered an unprecedented data breach.
Nobody, including super-cop SEBI, wanted to conduct a thorough probe. It
speaks volumes of how corrupt the system has been reduced to.”
“The primary ndings of the IIT Bombay and CFT team were sensational. It said,
The speed of some machines in NSE’s COLO farm that disseminated TBT data
was higher than others.”
“Missing emails, lost trails, contradictory statements and ominous silence of
exchange employees mark the forensic audit that highlighted clear possibilities
of NSE’s total disregard for rules and running a national exchange without well-
laid-down protocols only to favour and give preferential treatment to a few
brokers.”

CHAPTER 6: THE HEART OF DARKNESS

“Oblivious to the high-tech grid, domestic retail investors and mutual funds
were busy in their plain vanilla game. Little did they know that the knowledge of
the buy or sell orders that they were punching, reached the operators in NSE’s
COLO farm. This knowledge of the order book, which is TBT data, was fully
exploited by the HFT Algos that were in control and it was all a hand-in-glove
operation.”
“SEBI believed what it wanted to, but the design of the COLO farm revealed its
own tale. Every step seemed meticulously planned by those who had the nerve
and the knowledge of the stock exchange operations.”
“The information of the server with the lowest load was passed on by the
exchange staff to brokers, who connected to the fastest machines very often.”
“A select few with patronage in the NSE COLO farm were enjoying the party via
a secondary server—front-running the markets by milliseconds.”

CHAPTER 7: SOME GAMBLES ARE MORE EQUAL

“There has been a massive under-reporting by SEBI of the illegitimate gains
made by OPG Securities.”
“OPG churned ‘prop trade’ volumes worth a whopping Rs. 26.64 lakh crores
(approximately USD 484 billion based on a conversion price of Rs. 55 against
the USD) in the equity derivatives segment between 2010 and 2015.”
“OPG had contracted another New Delhi rm ‘Algotech’, for providing it with
trading software. Deloitte came across an agreement between Sunita’s (Ajay’s)
company Chanakya Trade Vistas (CTV) and Algotech for a software deal.”
“For reasons best known to senior SEBI o cials alone, they have completely
omitted the link between Ajay, IFPL, Algotech, OPG and Universal Broking, in the
course of their investigation and nal order.”
“Some of the other trading companies in the Deloitte list that were buried by
SEBI too have Singapore links.”
“In a single year in 2010, Goldman Sachs (India) Securities Private Limited
logged into secondary servers 69 times in NSE’s COLO. But SEBI had restricted
the scope of investigation of its TAC committee to a period between 2012 and
2015.”

CHAPTER 8: THE WHIFF OF MONEY

“Entities registered at the F-9C suite have billions of USD owing to it from the
mystic blue-sea islands of Mauritius and Cayman, the backyard of the world’s
lthy rich. The cash owing from these ‘tax havens’ is all ‘white money’ ready to
be moved anywhere in the world. Another similar address that attracts much
‘Manna from Heavens’ is Rocklines House, ground Floor, 9/2, Museum Road,
Bengaluru, Karnataka.”
“If Susan is a designated partner and key managerial person in a company
since 2010, which later contributed Rs. 200 crores to a PE fund, does the
regulator not need to know who actually this money belonged to?”
Viewed using Just Read