Is NSE’s Co-Location Facility Abusive: A Competition Law Analysis

[Rishabh Joshi is a 5th year B.B.A., LL.B. (Hons.) student at Gujarat National Law University, Gujarat]

Recently in its decision of Manoj K. Sheth v. NSE, (Case No. 35 of 2019) dated 28 June 2021, the Competition Commission of India (CCI) rejected the charges surrounding abuse of dominance against the National Stock Exchange (NSE) concerning the co-location facility. The informant had filed a complaint against NSE under section 19(1)(a) of the Competition Act, 2002, alleging violation of sections 4(2)(b)(ii) and 4(2)(c) of the Act. The informant had alleged that NSE had granted preferential access to certain brokers which results in market manipulation and information asymmetry amongst the trading members.

Allegations by the Informant

The informant alleged, while relying upon the complaint made by a whistle blower in 2015 before the Securities and Exchange Board of India (SEBI) and the subsequent report by the Technical Advisory Committee and Deloitte, that NSE has allowed preferential access to the data servers to certain stockbrokers, which has created a disadvantage to others. The allegation was that NSE has also allowed Internet Service Providers to lay fibre within its infrastructure for some select stockbrokers, and was hence working in collusion with them. Further, due to the high costs of the co-location facility, only 188 out of total 1000 members of the NSE are able to avail the co-location facility despite the services having been offered for about 10 years now. The facility creates an information asymmetry, as those who are the users of the service or have their servers located in NSE can access the entire order-book ahead of others. There is further discrimination in favor of those stockbrokers who are in collusion with the officials of NSE and hence obtain faster access to its system. In its order dated 10 February 2021, SEBI has also held that the co-location facility is prone to manipulation and market abuse and it consequently violates regulation 41(2) of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (the “SECC Regulations”).

Response by NSE

NSE stated that co-location facility is provided by recognized stock exchanges across the world such as NASDAQ and Chicago Stock Exchange to address latency issues and they have not been deemed to harm competition. In fact, SEBI has itself regulated this facility to address any potential discriminatory concerns. NSE also claimed that connecting to server does not necessarily result in data being received first. Further, the matter before SEBI concerning the issue of co-location facility has not yet attained finality as the appeal before the Securities Appellate Tribunal (SAT) is still pending. NSE also asserted that the CCI’s interference in the matter would result in parallel proceedings and thus go against the Supreme Court ruling in CCI v Bharti Airtel Ltd. and Ors. NSE claimed that if any trading member breaches the relevant guideline, it does not imply that NSE is liable. Moreover, the informant is committing a wrong by filing multiple petitions against NSE and not disclosing it to the CCI which is a mandatory requirement under The Competition Commission of India (General) Regulations, 2009.

Observation & Decision by CCI

In its preliminary observation, the CCI noted that a similar matter came before it in the case of Adv. Jitesh Maheshwari v. NSE but it refused to interfere in the matter because the issue was being investigated by SEBI then and there was a dearth of data.  However, the CCI simultaneously also agreed with the informant that pendency of an appeal before SAT does not impose a moratorium on the Commission’s statutory function to deal with violation of Competition Act. The CCI further noted that pendency of a matter in another forum does not axiomatically place an embargo on CCI to stop from fulfilling its statutory obligations.

The CCI thus framed the following two issues: first, whether NSE has abused its dominance through its co-location facility; and second, whether the manner in which such facility has been provided is in derogation with the Competition Act.

The informant had submitted that the relevant market should be the entire securities market in India because the co-location facilities affect trade in all securities. The CCI however took a narrower approach while determining the relevant market and delineated the relevant market for the sake of this case to be the ‘market for providing co-location services for Algo-trading in securities to the trading members in India’.

The CCI agreed with the informant on the dominance of NSE in the relevant market. Reliance was placed on Annual Report 2019-2020 of SEBI, data published by World Federation of Exchanges, NSE’s own Annual Report for 2019-20 and the prior decisions of CCI itself in MCX Stock Exchange v. NSE and UPSE Securities Ltd. v. NSE.

Coming to the question of abuse, the CCI took note of the findings of SEBI where it was held that NSE has failed to exercise due diligence while establishing tick by tick (TBT) architecture which resulted in information asymmetry. The same was observed to be unfair, non-equitable and a failure on part of NSE to ensure equal access. SEBI thus held it to be a violation of regulation 41(2) of SECC Regulations, 2012. Despite this observation, the CCI noted that if the technology chosen by NSE is prone to manipulation by some person without being in collusion with NSE then such conduct shall not count as abuse of dominance. Since there was no fraudulent conduct found by SEBI in contravention of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, the choice of technology may be considered bonafide and not in violation of section 4 of the Act. Further, co-location facility is being offered by BSE and other exchanges across the world as well. Thus the CCI did not find any prima facie case and thus closed the complaint under section 26(2) of the Act.     

Critical Analysis of the Order

The first ambiguity that arises in this order is from the CCI’s preliminary observation. The commission chose not to interfere with the investigation of the proceeding earlier. However, according to the judgment of the Supreme Court in R. Rajagopal Reddy v Padmini Chandrasekharan, a suit includes appeals and further appeals because they are simply the continuation of suits. In such a scenario, the findings of SEBI that were relied upon in the CCI order could be overturned in the SAT appeal, which may in turn lead to the CCI’s observation becoming infructuous. The CCI may be correct in pointing out that a proceeding in another court on the same cause of action does not impose a moratorium on its statutory obligation. However, in situations where a strong reliance in placed on the findings of the other court or tribunal to determine the competition law issue, then it may be appropriate to hold off the adjudication till the matter reaches finality.

The second crucial point to consider in this decision was that despite noting SEBI’s order wherein the findings showed the activities of NSE to be “unfair”, “non-equitable”, “denying equal access” and “resulting in information asymmetry”, the CCI did not find a prima facie case of competition law violation in the matter. SEBI had clearly pointed out in its order that many trading members had resorted to accessing the Secondary Server without any checks and balances and actions by the regulator. Thus, NSE has failed to ensure a level playing field for trading members subscribing to its TBT data feed system. This finding in itself showcases the impact on competition due to the actions (or inactions) of NSE. Determining whether there was collusion in existence between such trading members could have been done through the investigation by DG at a later stage. Thus, closing the matter under section 26(2) of the Act prevented the CCI from living up to its own initial view that same cause of action may lead to violations in different laws, which appeared to be the case in this situation.

A reference could also be made here to the Essential Facilities Doctrine while determining abuse. As per the doctrine, when an enterprise controls some of the infrastructure or facility which is required to access the market and is not reproducible or interchangeable, the enterprise may not refuse to share it at a ‘reasonable cost’ without proper justification. Although it may not be necessary for traders to avail the services of NSE without the use of co-location facility, it does provide a considerable advantage (as noted from the SEBI order). Further, the cost of such facility is high and not reasonable.

Finally, the CCI had pointed out in its order that other stock exchanges such as BSE also use the co-location facility. It is important to consider here that other stock exchanges may not enjoy a position of dominance like NSE does in the relevant market and only an enterprise which holds a dominant position is capable of abusing it under section 4(1) of the Act.

Conclusion

Based on the aforementioned points, in my view, greater clarity may be required on when CCI can intervene into the matter considering an appeal is a part of trial, especially in situation where the findings of the lower court or tribunal are relied upon by the CCI in its decision.  In such situations, an inclusionary approach by the adjudicating authority by taking up matter in tandem rather than at the same time may prove crucial. Further, a detailed investigation into the matter by DG was warranted in the present case to determine the issue concerning abuse of dominance by NSE.

Rishabh Joshi

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