What is co-location?
Co-location allow brokers to operate closer to their servers upon payment of additional fees. It helps brokers secure advantage over others due to proximity to exchange servers as data transmission takes less time. Orders reach exchange servers faster than those who have not availed of the facility.

What is the scam?
A whistleblower in 2014-15 complained to the Securities and Exchange Board of India (Sebi) saying some brokers in collusion with a few top NSE officials had abused the colocation facility. NSE was then using the so-called tick-by-tick (TBT) server protocol to relay data to members. The peculiar part about this protocol is how it delivers the information. Normal data protocols send data to all users connected on the network at the same time. But TBT transmits in the sequence of orders received. In other words, the user who gets the access to the system first would receive data earlier than the rest. A select set of brokers in collusion with NSE officials and Omnesys Technologies (the company that provided technology to NSE) got the first access to the NSE’s servers giving them a head start.

What did Sebi find?

The Sebi order found OPG Securities, GKN Securities and Way2Wealth along with internet service provider Sampark Infotainment were guilty of unfair trading practices. These brokerages continuously got first access to NSE servers.

How did OPG and others pull this off?

OPG got access to NSE’s backup servers which were maintained by the exchange to prevent technical glitches on the main server from impacting operations.

Traffic is either light or non-existent on these servers as they are for backup only. On normal days, even when the main server is working, anyone logging in through backup servers can send and receive data faster. OPG and others exploited this to their advantage, Traffic is either light or non-existent on these servers as they are for backup only. On normal days, even when the main server is working, anyone logging in through backup servers can send and receive data faster. OPG and others exploited this to their advantage, Traffic is either light or non-existent on these servers as they are for backup only. On normal days, even when the main server is working, anyone logging in through backup servers can send and receive data faster. OPG and others exploited this to their advantage, Sebi says.

Did NSE break rules?

The exchange allowed OPG and others access to back-up servers and gave them first access which helped them in executing orders fast. NSE also overlooked the fact that Sampark Infotainment did not have a valid Department of Telecom licence to provide dark fibre connectivity to some brokers. Along with brokers, Sebi has also charged several NSE top officials for colluding with brokers. These include former NSE CEO Chitra Ramakrishnan, former MD Ravi Narain, Deviprasad Singh, the former head of colo department at NSE, Ravi Varanasi, its current business development head, Umesh Jain, CTO of NSE, and others. In its report, Sebi has clearly said that the key functionaries did not follow the appropriate protocols. Further, NSE has been slapped with a fine of Rs 687 crore plus interest.

What is dark fibre connectivity?

A connection through dark fiber ensures more bandwidth and less distortion of data, meaning faster and efficient access to the exchange’s servers.

How will the order affect NSE?

NSE will have to pay Rs 687 crore and it can’t access capital markets for six months. Its IPO will be delayed till the year-end but that is unlikely to affect NSE or its valuation. NSE also has enough reserves to pay this fine and remain financially strong.

Will normal operations be affected?

No. The Sebi order in no way affects normal trading on the exchange.

Source : https://economictimes.indiatimes.com/markets/stocks/news/co-location-scam-jigsaw-and-how-sebi-cracked-the-code/articleshow/69123267.cms