Moneylife vs NSE: Understanding the Mumbai HC judgment

Fish foul NSE in Mumbai and journalism in India
Flix Thursday, September 24, 2015 - 19:53

 

Every criticism is not defamation. Every person criticized is not defamed. Journalists are whistle-blowers. They are also in their line of duty when they respond to whistles by other whistleblowers. Journalists have a moral and ethical responsibility – it is incumbent upon them to verify if someone is whistling in the dark or trying to bring out important information. People depend on pesky, angry and even journalists who shout to ascertain facts that give them (people) a fair chance to take informed decisions. Small investors are particularly vulnerable. Many of India’s major scams have seen the light of day due to an intrepid, will-not-give-up reporter and the National Stock Exchange (NSE) cannot sit on a high horse ignoring legitimate questions.

The preceding lines are the paraphrased words of Justice G.S. Patel of the Mumbai High Court who earlier this month ruled in favour of defendants Sucheta Dalal and Debashis Basu of the webzine Moneylife. The journalists were sued for 100 crore rupees in defamatory damages by the NSE in Mumbai which claimed that an article they had written in June 2015 defamed them. The Mumbai High Court threw out the case and asked the NSE to pay the journalists and two hospitals a total sum of 50 lakh rupees. The 30-page judgment is an important document for all interested in the role of journalism as a public good and the role of institutions in a democracy.

The centerpiece of this case is high speed trading (HST, also called high-frequency trading) and algorithms that enable monies and financial products to move at the speed of a bolt of lightning.  This type of trading is completely automated and seeks quick profits using algorithms that connect to markets and move them even before smaller players understand what happens. There are experiments that show monkeys outperforming traders in this exercise, but that is not the point of this piece.

Algo trading is very big in what it moves. It is controlled by a handful of entities unavailable for scrutiny despite their actions having an impact on small and medium investors. High frequency trading is a tapestry of all exchanges in this market where such products move in a united fashion in a manner that human beings cannot control. Machines replace people.

The moot point the whistleblower makes in the anonymous letter to the NSE, copied to the Securities and Banking Exchange (SEBI) and Ms. Dalal is that HST trading firms may be in collusion with market exchanges to rig them in favour of a few companies to make illegal profits.

Is it fair? No, a financial expert told The News Minute (TNM). “These algorithms are so tuned that they work like a heat-sensing device. As soon as a big trade or entity enters the market, they gravitate towards it automatically in search of quick profits.”

Confused? Think of fish or pigeons. The moment you throw a piece of food into a large lake, big fish rush to swallow. Small fish follow but find nothing. If you throw grains at pigeons at the Gateway of India in Mumbai or the Piazza San Marco in Venice (Italy) the same phenomenon is at play. The fastest takes all. Work this synchronization of the big and small into an algorithm and you begin to understand how HST works.

In its critical judgment, the Mumbai High Court says algo trades are the product of very high-end mathematical modeling. “These are models devised specifically to anticipate the most microscopic changes in markets and to respond to those changes in a mater of seconds. This is done not through any human intervention, an aspect that is totally eliminated but in a wholly automated fashion by computer-generated or triggered transactions,” justice Patel says.

The contortions such trades create may be spectacular to watch but they destabilize the market for a few seconds so the big movers can take their profits and run. In their piece Dalal and Basu say “Government sources tell us that the NSE’s management of HFT servers in the initial years until 2013 (which is the subject of the whistleblower’s letter) may need a detailed review by the SEBI or an investigative agency.”

Justice Patel goes on to say that the NSE seems to have taken more or less for granted  “…that our Courts are too easily cowed by self congratulatory and overblown claims of rectitude to even consider refusing criticism. This is an approach that must be deprecated…”

The judgment has not received the publicity it deserves in the Indian and international media. That itself is a commentary on the media.  If we in the media believe something is too complicated to understand or explain, we are in the wrong business.

Read our pieces on this case here.

 

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