The NSE Saga

 What has it come to? A dynamic lady leading a leading stock exchange of not just India, but of the world is found guilty of abusing her position and is found being led by a scamster "yogi". She has been found divulging the company strategy and financial details to the unknown "yogi". Based on his advice she appoints someone who has no background in stock exchange as a consultant and then elevates him almost into the top management cadre of the exchange.

Chitra Ramakrishnan, the name has been dragged through the mud in the last month or so. Not many, except those in the financial industry, would have heard about the lady. She was among the chosen few who was inducted into National Stock Exchange from IDBI. She was the blue eyed girl in IDBI and was made part of the team who were expected to setup a Stock Exchange as rivals to the Bombay Stock Exchange

BSE had been ruling roost as the country's premier exchange for several decades now. The BSE was run, managed and exploited by the brokers. When a normal retail investor placed a buy order he would be told that the stock was bought at the highest price of the day and when the retail investor placed a sell order he would be told that the stock was sold at the lowest price of the day. Who enjoyed the difference? Of course the brokers who were the only ones with exclusive access to the trading floor of the BSE. And they also charged the investor the brokerage fee. Double cream for the broker and double whammy for the investor.

There were other shady deals like the now infamous badla deals. Where one could buy and sell shares even if one did not have the money to buy them or the shares to sell. One could keep rolling the buys and sells till one ran out of steam. The infamous Harshad Mehta, with the connivance of the bankers exploited the exchange and rolled in money till the weakest link came apart sinking him and the exchange.

The brokers were all powerful in the exchange and they dictated the rules and regulations. The National Stock Exchange was setup to counter this all powerful lobby and at the same time it was supposed to win the trust of the same. brokers to become its member and work with an electronic system. They would have a limited say in the rules and regulations. SEBI had been setup to establish vigilance of exchanges while it was yet to grow teeth and fangs to scare the exchanges its presence could be felt hovering over the exchange.

The NSE under Mr. R. H. Patil and the team of young turks including Mr. Ravi Narayan as the CEO and MD and Mrs, Chitra Ramakrishnan successfully setup first the money market and then the equity market. It was a huge success. What made it successful was the trust the retail investors placed in the electronic trading. Electronic Trading made it possible and SEBI made it mandatory for the brokers to disclose the exact price at which the trade was done. This along with the stringent audit of the accounts of the brokers made it difficult for the brokers to charge the retail investors more than what they should.

While the late nineties and the beginning of the new millenium saw the rise and rise of NSE the regional stock exchanges (Cochin, Ahmedabad, Calcutta) got reduced to the level of brokers. They were forced to shut shop. All the listing from these exchanges were moved to BSE and NSE and these exchanges remained as an exchange only in name. They ended up being glorified brokers.

In 2013 when Mr. Ravi Narain moved out, it was no surprise that Mrs. Chitra Ramakrishnan took over the helm of the NSE. Nobody could have imagined what was to come. Mrs. Chitra came under the influence of a "Yogi" who claimed to be in the Himalayas and he conned Mrs. Chitra to reveal a lot of information about the Exchange. He also pushed Chitra to taking on Mr. Anand Subramanian who was the spouse of a close friend and an employee of the exchange. Now what exactly prompted Mrs. Chitra to be taken in by the "Yogi" will be known only to her, the "Yogi" and God.

This is what possibly happened. Mr. Anand Subramanian who would have Mrs. Chitra personnally, or at least through this spouse is likely to have create the facade of the "Yogi". He might have pretended that this "Yogi" is a highly spiritual person who had helped him in his career. He would have further acted like he was introducing Mrs. Chitra to the "Yogi" and would have made the "Yogi" impress Mrs. Chitra by revealing secrets about her and her family which she may have shared with her colleague and friend. Mr. Anand would have seen this as a golden opportunity toi further his growth. Mrs. Chitra seems to have fallen hook, line and sinker for this "Yogi" and she started giving Mr. Anand Subramanian more and more powers based on instructions from this "Yogi".

How Mrs. Chitra claims to have met the "Yogi" and how Mr. Anand Subramanian conned her on this front is so far known only to those two. It seems to be a fact that they both travelled to Seychelles and other tax havens together. What was the relationship between them and how far it extended is also at this time known only to them.

It is pertinent to note that there possibly was no protest, at least in public and there were no whistle blowers at NSE who spoke up against the one upmanship of Mrs. Chitra. There would definitely have been heart burns enough to raise the heckles with NSE. This is thanks to the typical Indian mentality of "Boss is right and Boss can never be wrong" Even if boss is wrong tell them that they are right. The culture of not questioning the "leaders" (Can we even call them leaders?) in the Indian Corporates (It is not to say that the corporates of the other countries are any better and there is enough evidence to prove that it is almost the same in most countries) that helps the head of the organization to have their say in the running of the organization. As long as the organization is financially doing well no one questions the head. And in this case NSE was going from success to success under the mantle of Mrs. Chitra. There was no seeing back for NSE. In the derivative market BSE was decimated and in the pie of BSE in the equity market was very less compared to that of NSE. NSE was also equally successful in the other markets that it ventured into. So no one questioned Mrs. Chitra.

What brought about her downfall was something of which she is very unlikely to be guilty of. It was the starting of era algorithmic trading, which is nothing but a way for the rich to get richer. Brokers who were rich enough to put up their own server, create their own algorithms, who are able to push back a speculative order milli or sometimes even microsecnds before other rich borkers made money. Most of these are speculative trades. It was a mechanism to beat the day traders who bought and sold or sold and bought on the same day so that the only settlement they had to do was to pay up for the loss or to collect the money when they profited. Now instead of a human speculating it was a machine, an algorithm which did the speculation.

One of the keys to succeed in algorithm trading is to get the latest price as early as possible. So the elite brokers were allowed to setup their servers almost alongside the servers of NSE where the trading took place. This is what happens world over in the exchanges where algorithmic trading is allowed (which is today all the major stoick exchanges). Now to ensure any software works without failure one ends up hosting more than one servers from which the services provided by the service provider can be availed. So keeping that principle in mind NSE had setup two servers to serve the prices to the brokers. The other key point is that the prices were sent to the brokers on a first come first serve basis. This was possibly not a public knowledge to begin with.

Now what is being stated are two situations that could have happened. On a particular day a broker might have complained that their servers are getting the price with a long delay. Someone from the operations might have inadvertently told the broker about the existence of the second server. Now when the broker tried connecting to the second server they would have noticed that they get the prices much earlier than on the main server. This broker or the set of brokers would have used this knowledge to now start connecting to the second server to get the price earlier than the other brokers.

The second possibility, which while possible seems a little unlikely, is that some of the brokers could have got to know some of the operators on the NSE side and would have weedled out the presence of the second server or could have got into an agreement that if they are given the whereabouts of the second server they would give a cut of their profits. The regulatory and investigative authorities seem to believe that this has happened. And it is on the basis of this that Mrs. Chitra has been arrested. Even if this was the case it is unlikely that Mrs. Chitra would have come to know about it and it is very unlikely that if it had been brought to her notice she would have let it be that way and have accepted a cut in the illegal profits.

What exactly happened at NSE between the operators and brokers is anyone's guess. It is unlikely anyone will come forward to confess the truth. Did some one connive with the brorkers? If not did someone notice the usage of the second server? If so did they understand the import of the usage of the second server? Did they notify the management? Was Mrs. Chitra aware of this? Seems very unlikely. but unfortunately for Mrs. Chitra this incident has worked against her. Her, if we can call it that, abuse of power by bringing in Mr. Anand Subramanian and elevating him to such a high position in quick succession which is what should have been investigated more in depth has been sidelined to a large extent and the preferential feed of price to some brokers seem to have taken precedence.

To summarize is Mr. Anand Subramanian guilty. Absolutely without any doubt. Is Mrs. Chitra or Mr. Ravi Narain guilty. Very unlikely. If at all Mrs. Chitra, at least to begin, seems to have been naive to believe in the "Yogi" introduced to her by Mr. Anand. Later on the relationship might have taken a different turn and she could have found herself in a situation where it was difficult for her to say that she fell for a charlatan. If at all she is guilty, it is of abusing her power as the head of the organization to bring in someone who was incapable of the holding the post he was given by her.

As for the preferred price feed issue as mentioned earlier it would most likely have been an inadvertent revelation by some operator at the NSE. It is unlikely that they connived with the brokers for a cut. If this has happened the change in the life style of the operators in that time period would clearly reveal who all benefitted.