CCI Dismisses Allegations of Abuse of Dominance Against National Stock Exchange of India Limited

On June 28, 2021, CCI dismissed allegations of abuse of dominance by National Stock Exchange of India Ltd. (‘NSE’), made by Mr. Manoj K. Sheth. Mr. Sheth alleged that NSE provided preferential and unfair access to certain brokers (in terms of access to order, trade and price data), who had paid for co-location services. Such preferential treatment allegedly allowed such brokers to operate closer to NSE’s servers upon payment of additional fees. [1] Moreover, Mr. Sheth submitted that the close proximity to servers resulted in low latency connectivity to the exchange, enabling users to receive granular tick by tick data like order, cancellations, modification, prices, trades, etc. ahead of other particularly benefiting proprietary and high frequency brokers. Mr. Sheth also referred to a whistle-blower’s complaints made to Securities and Exchange Board of India (‘SEBI’) in 2015 regarding NSE providing preferential treatment to select stock brokers (in terms of access to servers, laying fibres, etc.), where SEBI had found that certain stockbrokers had certain insider information regarding the timings and speed of NSE’s servers. In sum, Mr. Sheth alleged that NSE’s conduct entailed discrimination in provisions of services by a dominant exchange to its members.

Interestingly, NSE contested CCI’s jurisdiction stating that SEBI had passed an order on similar facts and that the matter was currently before the Securities Appellate Tribunal (‘SAT’). However, CCI observed that “there is nothing to suggest that mere pendency of an appeal before SAT necessitates the Commission to place any moratorium on its statutory functions, if an infraction of the provisions of the Competition Act is observed in the facts and circumstances of the matter.” Accordingly, CCI proceeded with its analysis and identified the following issues: (a) whether, the provision of co-location facility by NSE per se, violates Section 4 of the Act; and (b) whether the manner in which NSE provided the facility, giving an unfair advantage and discriminating between members who availed such facility, violates Section 4 of the Act.

Although Mr. Sheth proposed delineating the relevant market to include securities trading as a whole, the consumers for the co-location facilities were algorithmic traders. Accordingly, CCI delineated the relevant market as the “market for providing co-location services for algorithmic-trading in securities to the trading members in India.” Relying on SEBI’s annual report, NSE’s ranking as per the World Federation of Exchanges, NSE’s own annual reports and MCX Stock Exchange Ltd. & Ors. v. National Stock Exchange of India Ltd. & Ors., CCI noted that NSE was dominant in the relevant market. However, CCI alluded to NSE’s submission that at the time of introducing the co-location services, SEBI had not prescribed any specific technology to be used and that it had a choice between (a) TCP/IP technology; and (b) MTBT. NSE justified its initial preference of TCP/IP technology (which provided safety, reliability, integrity and accessibility) as the market was nascent at that time. However, NSE entirely switched to MTBT by 2016 and TCP/IP was phased out.

CCI noted that “if such technology could have been prone to some kind of manipulation by certain unscrupulous persons/members, hitherto, not in the contemplation of NSE, then it may not be appropriate to term such conduct as abusive.” CCI did not find a violation of Section 4 as: (a) it was NSE’s bonafide choice of a technology; and (b) SEBI did not observe any instance of fraudulent conduct in violation of SEBI (PFUTP) Regulations, 2003 in the provision of the co-location facility which has been the mainstay of the allegations against NSE. Finally, CCI acknowledged the global usage of co-location facilities, benefits arising from co-location facilities (such as increase in volumes of trade and providing liquidity to investors) and that SEBI has not stopped the co-location facility in any manner since its introduction. On this basis, CCI dismissed the allegations of abuse of dominance by NSE.

 

[1] Case No. 35 of 2019, order dated June 28, 2021.

Published In:Inter Alia Special Edition - Competition Law - September 2021 [ English
Date: September 16, 2021