Currency Wars: “Beggar Thy Neighbor” Policy
February 12, 2025
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The National Stock Exchange (NSE) is one of the two leading stock exchanges in India. Ironically, the National Stock Exchange was created as a result of a huge scam which happened in the Bombay Stock Exchange (BSE). The regulators were of the opinion that the broker nexus in the BSE was too strong. Hence, in order to reduce their power and give investors more options, the NSE was created.
However, ironically, NSE has now found itself in the middle of a massive scandal. Securities and Exchange Bureau of India (SEBI) which regulates Indian stock markets has found the National Stock exchange guilty in the co-location fraud.
In this article, we will have a closer look at what the co-location scandal is. We will also understand how stockbrokers used technology as well as their personal connections in order to gain a competitive edge over their peers.
The NSE co-location scam included possible market manipulation by brokers and technology companies.
This might not seem like a big deal, but it is. This is because many of these brokers were using algorithmic trading software. Hence, they were not placing trades manually. This meant that even if they were receiving information mere fractions of seconds earlier than the others, they were able to leverage technology and quickly place favourable bets based on the information advantage that they had. Using the combination of co-location and algorithmic trading, brokers were making in millions of rupees every day. This continued for a couple of years before a whistleblower wrote a letter to SEBI and this scandal became known to the external world. Many critics have also alleged that the concept of co-location is not legal in India. However, this cannot be clearly inference as the law can be interpreted in more than one ways.
Ever since the scam broke out, the NSE has been facing litigation for several years. Now since it has been convicted it faces several monetary implications. However, most importantly its image as an unbiased stock exchange has been tarnished.
Along with the course, SEBI has also punished the higher-ups at NSE for what it deems to be negligence. SEBI has asked many top-ranking officials in the National Stock Exchange to return about 25% of their compensation for the past several years. This move has been done to ensure that top-ranking individuals at stock exchanges are individually made responsible for the actions undertaken by their bourses.
Hence, one of India’s largest stock exchanges has been found guilty of enabling insider trading. Although the issue has been detected and also penalized, it still raises questions on the entire trading infrastructure in India.
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