https://www.sundayguardianlive.com/news/stock-market-mafia-nse-scandal
Stock market mafia and NSE scandal - The Sunday Guardian Live
Excerpts from The Market Mafia by Palak Shah, made exclusively available to The Sunday Guardian.
The Market Mafia 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 financial markets. A cabal of high flying bureaucrats, stock exchange executives, SEBI officials 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 influence 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 financial 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 fighting 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 conflict 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 flourishing 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 finger 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 officials, 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 officials 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 Mafia’. 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 fingers 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 fulfilment of requirement for degree of Doctor of Philosophy’. Like USC displays a PhD certificate 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 official in doctorate studies, did not herself hold a PhD degree. Blessings of Dr. Patil, NSE’s founder boss and a father figure 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 officially 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 fiasco, India had its tryst with the ‘Flash Boys’ in 2009. It was before the world woke up to the speed link fibre optic cable that was established between Chicago and New York. The flipside of HFT and Algos was witnessed by the world, first during the US flash 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.”
Stock market mafia and NSE scandal - The Sunday Guardian Live
Excerpts from The Market Mafia by Palak Shah, made exclusively available to The Sunday Guardian.
The Market Mafia 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 financial markets. A cabal of high flying bureaucrats, stock exchange executives, SEBI officials 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 influence 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 financial 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 fighting 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 conflict 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 flourishing 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 finger 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 officials, 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 officials 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 Mafia’. 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 fingers 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 fulfilment of requirement for degree of Doctor of Philosophy’. Like USC displays a PhD certificate 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 official in doctorate studies, did not herself hold a PhD degree. Blessings of Dr. Patil, NSE’s founder boss and a father figure 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 officially 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 fiasco, India had its tryst with the ‘Flash Boys’ in 2009. It was before the world woke up to the speed link fibre optic cable that was established between Chicago and New York. The flipside of HFT and Algos was witnessed by the world, first during the US flash 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.”