NSE Files Fresh Plea to Settle TAP Case
- August 8, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
NSE Files Fresh Plea to Settle TAP Case
Sub: Geo
Sec: Geomorphology
Fresh Plea Submission:
- NSE’s Action:
- The National Stock Exchange (NSE) has filed a fresh plea with the Securities and Exchange Board of India (SEBI).
- This plea aims to settle a regulatory probe into the misuse of its Trading Access Point (TAP) software. The plea includes Revised Settlement Terms (RST).
Background:
- Previous Settlement Attempts:
- NSE filed settlement pleas with SEBI in 2022 and 2023.
- These applications were returned by SEBI due to an ongoing investigation.
- Show-Cause Notice:
- NSE received a show-cause notice from SEBI on February 28, 2023.
- NSE responded with a settlement application, expressing willingness to pay a fair sum as per regulations without admitting guilt or liability.
- SEBI’s Response:
- SEBI conducted several internal committee meetings with NSE staff.
- On March 5, NSE filed an RST with SEBI.
SEBI’s Decision:
- Rejection of Consolidated Offer:
- On May 24, SEBI rejected the consolidated offer from NSE.
- SEBI’s High Powered Advisory Committee on Settlement Orders and Compounding of Offences refused to accept the offer.
- NSE was directed to submit “individual applications” with the RST.
- Board Approval and Awaited Response:
- Following its Board’s approval on June 14, NSE filed the individual applications with the RST.
Co-location Scam and TAP Misuse:
- Co-location Scam Details:
- The misuse of TAP in 2013 was unearthed four years later by the Income Tax department during a probe into the co-location scam.
- High-frequency traders manipulated TAP by using software to gain unfair advantages. These traders avoided paying NSE’s transaction fees.
- The scam involved select brokers gaining faster access to NSE’s data and trading facilities, providing an unfair advantage over others.
- Introduction of New TAP Software:
- In FY14, NSE rolled out new TAP software for co-location users.
- This software was used to send orders from member servers to NSE, reducing latency by 400 microseconds to 100 microseconds.
Summary: The NSE has submitted a fresh plea to SEBI to settle allegations of misuse of its TAP software, including revised settlement terms. The plea follows previous settlement attempts and a show-cause notice from SEBI. SEBI had initially rejected NSE’s consolidated offer, directing the exchange to file individual applications. The misuse of TAP, discovered during a probe into the 2013 co-location scam, allowed high-frequency traders to gain an unfair advantage and avoid transaction fees, leading to significant regulatory scrutiny.
Trading Access Point (TAP) Software
- The Trading Access Point (TAP) software is an application used by the National Stock Exchange (NSE) to facilitate high-frequency trading.
- It allows co-location users to send orders from their servers to the NSE’s trading systems with minimal latency.
Key Features:
- Latency Reduction:
- TAP is designed to significantly reduce latency, which is the time it takes for an order to travel from the trader’s system to the exchange.
- The new TAP software rolled out in FY14 reduced latency by 400 microseconds to 100 microseconds.
- Order Routing:
- TAP ensures efficient and fast routing of orders, which is critical for high-frequency trading where every microsecond counts.
- High-Frequency Trading:
- TAP is crucial for high-frequency traders who rely on extremely fast order execution to capitalize on small price movements.
- Competitive Advantage:
- Reduced latency can provide a significant competitive edge, allowing traders to react more quickly to market changes.
Why an Indian Start-up Lobby has Filed an Antitrust Complaint Against Google
Context and Timing:
New Digital Competition Law:
- India is currently discussing a comprehensive digital competition law.
- This law aims to increase preemptive compliance for large tech companies like Google.
Previous Antitrust Scrutiny:
- In 2022, the Competition Commission of India (CCI) fined Google for “abusing its market dominant position” in the Android ecosystem.
Complaint by Alliance of Digital India Foundation (ADIF):
Allegations Against Google:
- Dominance in Online Platforms: Google’s dominance and reliance on advertising hinder competition and negatively impact Indian businesses.
- Ad-Ranking System: Google’s system involves advertisers bidding for ad placement, creating a “black-box” scenario.
ADIF claims this leads to artificially inflated ad prices.
- Trademark Usage: Google allows competitors to bid on trademarked keywords, benefiting Google at the expense of advertisers and trademark owners.
- Self-Preferencing: Google allegedly prioritizes its own services over competitors, restricting market access for other businesses.
- Privacy Sandbox Initiative: ADIF is concerned that removing third-party cookies from Google Chrome will hamper non-Google platforms’ ability to serve advertisers effectively.
Details on Privacy Sandbox Initiative:
- Impact on Digital Advertising:
- Third-party cookies have been essential in digital advertising for two decades.
- Google’s phasing out of these cookies could disadvantage non-Google Demand Side Platforms.
India’s Draft Digital Competition Law:
Inspired by European Regulations:
- The proposed Digital Competition Bill, 2024, aims to prevent self-preferencing by tech giants.
- It proposes presumptive norms to curb anti-competitive practices pre-emptively.
- The Bill includes provisions for heavy penalties for violations.
Associate Digital Enterprises (ADEs):
- ADEs would have the same obligations as Systemically Significant Digital Enterprises (SSDEs).
- Obligations depend on the level of involvement with the core digital service offered by the main company.
- Example: Google Search directing data to Google Maps or YouTube could deem these services as ADEs.
An Indian start-up lobby group, ADIF, has filed an antitrust complaint against Google, citing the company’s dominance in online advertising and practices that stifle competition. This move comes amid India’s discussions on a new digital competition law, aimed at regulating large tech companies.
The complaint highlights concerns over Google’s ad-ranking system, self-preferencing, and the Privacy Sandbox initiative, which could harm non-Google advertising platforms. The draft Digital Competition Bill seeks to prevent such anti-competitive practices and impose strict penalties for violations.
Key Proposals under the Draft Digital Competition Bill: Proposals and Opposition
- Predictive Regulation:
- Ex Ante Framework: Unlike the current ex post framework under the Competition Act, 2002, which regulates market abuse after it occurs, the draft Bill proposes an ex-ante framework.
Pre-determined No-Go Areas: The Bill sets pre-determined rules to prevent market abuse, reducing delays associated with penalizing offending companies after the fact.
- Significant Entities:
- Systematically Significant Digital Enterprise (SSDE): The Bill proposes designating certain companies as SSDEs based on their role in core digital services such as search engines and social media sites.
Criteria include:
Turnover in India of at least Rs 4,000 crore or global turnover of at least $30 billion over the last three financial years.
Gross merchandise value in India of at least Rs 16,000 crore.
Global market capitalization of at least $75 billion.
Core digital services having at least 1 crore end users or 10,000 business users.
- Prohibitions on SSDEs: SSDEs would be prohibited from self-preferencing, anti-steering, and restricting third-party applications.
Violations could result in fines up to 10% of their global turnover.
- Associate Digital Enterprises (ADEs):
- Data Sharing Obligations: ADEs, or entities associated with a major technology group, would have similar obligations as SSDEs.
The level of these obligations would depend on their involvement with the core digital service offered by the main company.
Examples:
Google Maps and YouTube could be deemed ADEs due to their data sharing with Google Search.
Criticism and Opposition from Big Tech
- Compliance Burden:
- Strict Norms: The ex-ante framework‘s strict prescriptive norms could lead to a significant compliance burden.
- Tech companies argue this could shift their focus from innovation and research to ensuring they do not engage in anti-competitive practices.
- Impact on Operations:
- Platform Changes: If the law goes into effect, companies like Apple might have to allow iPhone users to download apps from third-party app stores, something Apple opposes.
- Similarly, Google is concerned about the security ramifications of sideloading apps.
- Broad Definitions:
- Discretion of CCI: The draft law leaves the designation of significant platforms to the discretion of the Competition Commission of India (CCI), unlike the EU’s Digital Markets Act (DMA), which specifically names gatekeeper entities.
- This could lead to arbitrary decision-making, potentially impacting startups.
- Impact on Small Businesses:
- Reduced Data Sharing: Changes required by the Bill could impact smaller businesses that rely on big tech platforms to reach a larger audience.
- Companies claim that reduced data sharing could hinder the effectiveness of these businesses.
Government’s Perspective
- Addressing Anti-Competitive Practices:
- Historical Issues: Government officials believe that big tech companies have a history of engaging in anti-competitive practices.
- An ex ante framework is seen as more effective in preventing these issues.
- Fostering Innovation:
- Market Barriers: High market barriers for new entrants are seen as a major reason for the concentration of innovation within a few big tech companies.
- The Bill aims to lower these barriers and foster more competition and innovation.
- Concerns Over Dominance:
- Default Services: Once a company gains a significant market share, their product often becomes the default service, making it difficult for rivals to compete.
- The Bill seeks to address this dominance and promote a more competitive market environment.