Context: The Securities and Exchange Board of India (SEBI) will challenge the order of the Securities Appellate Tribunal (SAT), which set aside Rs 624 crore disgorgement order against the National Stock Exchange (NSE) by the market regulator in the co-location scam.
Meaning of Co-location:
Co-location is a data centre facility where third parties can lease space for servers and other computer hardware.
They provide infrastructure like power supply, bandwidth and cooling for setting up servers and storage of data.
Customers usually rent out space by rack, cabinet, cage or room.
About the NSE co-location case:
The NSE introduced co-location facilities in 2009 and offered traders/brokers the ability to place their servers within NSE’s data centre for a fee.
By being in close proximity to the stock exchange servers, traders/brokers would have faster access to the price feed and the execution of trades, due to the low latency connectivity.
In January 2015, a whistle-blower wrote a complaint to SEBI, alleging that some brokers who leased space at the NSE co-location facility, were able to log into the NSE systems with better hardware specifications while engaging in algorithmic trading.
This allowed them unfair access from the period 2012-2014, as the hardware specifications gave them a split-second advantage in accessing the price feed.
A minuscule difference in time can lead to huge gains for a trader.
At that time NSE used to disseminate information through unicast, which is a single, direct request sent from one host to another, with only those hosts interacting over the route.
At least 15 brokers were identified by SEBI for having preferential access.
