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.

‘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.”

“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.”

“Those handful people, occupying the upper echelons of NSE, were letting down the very institution where they were employed for a long time. This cabal with no regard for rules or fear of law were embodied in abuse of power with impunity.”
“It was only when Enron dragged India to the International Court of Justice (ICJ), Chidambaram relinquished his position as its legal adviser at the time when he was made the FM by Sonia Gandhi. Ironically, the Congress-led government in which Chidambaram virtually held the number 2 ranking, engaged a Pakistani-origin lawyer named Khawar Qureshi to present the Indian side at ICJ. Pakistan has the status as India’s enemy and the dimwit lawyer lost the ICJ case in months. Harish Salve was fighting the case for India at ICJ before UPA came to power. Nobody knows why the erudite legal expert was replaced by an enemy country’s inefficient lawyer.”
“Interestingly, the lawyer who argued for Chidambaram in the case was another prominent lawyer-cum-politician and BJP leader, Arun Jaitley. Both Chidambaram and Jaitley took turns at becoming India’s successive FMs, albeit from different political parties and governments. But the grapevine goes that they were brothers in arms and often came to the rescue of each other. But that is a different story.”
“Nalini was, of course, one, but controversy seemed Chidambaram’s another wife.”
“SEBI’s inefficiency was at its peak when the regulatory officials came across a ‘fake’ agreement between NSE, Ajay and Susan but it did not refer to the case for a thorough criminal probe.”
“‘Data was shared with Ajay on the request of MD and DMD,’ Ravi Apte, NSE’s chief of technology between 2007 and 2013, said during his interrogation by SEBI. His fingers pointed towards his two bosses, Ravi Narain and Chitra Ramkrishna. Oral orders came from the top, other NSE officials too divulged during audit investigations.”
“With unimpeded access, Ajay and Susan were being discreetly fed vital trade data from NSE all through 2009, just weeks ahead of the mysterious giant leap of Sensex and Nifty on May 18 that year, which shut down trading at the BSE and NSE. There was so much information in the files NSE shared with Ajay that he passed it to IFPL for improving and back-testing Chanakya’s Algo codes.”
“The blatant data breach at NSE, involving the exchange top brass, was unparalleled in the history of stock market scams in terms of sheer planning and scale. Ajay and Susan argued for a framework on Algo trading and even got the data on a platter which was obviously misused by them for their commercial gains by developing Algo trading products for sale in the securities market.”
“What was the desperation for the country’s FM to micro-manage NSE? SEBI went on to say NSE’s behaviour was a systemic risk. Later, a former NSE board member told a journalist that the problem was that non-written communication travelled much faster at the exchange and left no audit trail.”

“If Ravi Narain and Chitra Ramkrishna had a reputation of salaried executives playing by the rule book, Shah, in contrast, came across as a ‘business-man’ with the permanent air of outsider intent on crashing into the party. After his two successful ventures, the FTIL and MCX, Shah declared that he would be a billionaire before he turned 40, a goal he missed narrowly.”
“NSE’s lawyer, who has managed to delay the case thus far is another Congress party veteran, Abhishek Manu Singhvi. Once he even sought a date from the apex court saying that he was busy in general elections.”
“With an attack on FTIL, the NSE had not only under-cut Shah’s revenue base and the foundation of his business, but also stole ODIN’s first-mover advantage in COLO trading that went to Omnesys. Since NSE was the monopoly exchange, FTIL had nowhere else to go and once volumes increased via DMA and COLO grid, no other exchange would be able to steal a march over NSE ever. The dominance of those who controlled NSE would also remain intact.”

“Rajeev Agarwal’s ouster from SEBI was a peculiar case that shows the power play of the ‘bureaucratic brotherhood’ in India and the cabal that was accustomed to arm-twisting the administrative system.”
“For the exchange industry, the Jalan rules mimicked the period called licence-Raj in India when every industry was regulated and there was an elaborate system of permits and licences, regulations accompanying red tape that were required to set up and run businesses in the country.”
“Two of India’s largest exchanges suffered an unprecedented data breach. Nobody, including super-cop SEBI, wanted to conduct a thorough probe. It speaks volumes of how corrupt the system has been reduced to.”
“The primary findings of the IIT Bombay and CFT team were sensational. It said, The speed of some machines in NSE’s COLO farm that disseminated TBT data was higher than others.”
“Missing emails, lost trails, contradictory statements and ominous silence of exchange employees mark the forensic audit that highlighted clear possibilities of NSE’s total disregard for rules and running a national exchange without well-laid-down protocols only to favour and give preferential treatment to a few brokers.”

“Oblivious to the high-tech grid, domestic retail investors and mutual funds were busy in their plain vanilla game. Little did they know that the knowledge of the buy or sell orders that they were punching, reached the operators in NSE’s COLO farm. This knowledge of the order book, which is TBT data, was fully exploited by the HFT Algos that were in control and it was all a hand-in-glove operation.”
“SEBI believed what it wanted to, but the design of the COLO farm revealed its own tale. Every step seemed meticulously planned by those who had the nerve and the knowledge of the stock exchange operations.”
“The information of the server with the lowest load was passed on by the exchange staff to brokers, who connected to the fastest machines very often.”
“A select few with patronage in the NSE COLO farm were enjoying the party via a secondary server—front-running the markets by milliseconds.”

“There has been a massive under-reporting by SEBI of the illegitimate gains made by OPG Securities.”
“OPG churned ‘prop trade’ volumes worth a whopping Rs. 26.64 lakh crores (approximately USD 484 billion based on a conversion price of Rs. 55 against the USD) in the equity derivatives segment between 2010 and 2015.”
“OPG had contracted another New Delhi firm ‘Algotech’, for providing it with trading software. Deloitte came across an agreement between Sunita’s (Ajay’s) company Chanakya Trade Vistas (CTV) and Algotech for a software deal.”
“For reasons best known to senior SEBI officials alone, they have completely omitted the link between Ajay, IFPL, Algotech, OPG and Universal Broking, in the course of their investigation and final order.”
“Some of the other trading companies in the Deloitte list that were buried by SEBI too have Singapore links.”
“In a single year in 2010, Goldman Sachs (India) Securities Private Limited logged into secondary servers 69 times in NSE’s COLO. But SEBI had restricted the scope of investigation of its TAC committee to a period between 2012 and 2015.”

“Entities registered at the F-9C suite have billions of USD flowing to it from the mystic blue-sea islands of Mauritius and Cayman, the backyard of the world’s filthy rich. The cash flowing from these ‘tax havens’ is all ‘white money’ ready to be moved anywhere in the world. Another similar address that attracts much ‘Manna from Heavens’ is Rocklines House, ground Floor, 9/2, Museum Road, Bengaluru, Karnataka.”
“If Susan is a designated partner and key managerial person in a company since 2010, which later contributed Rs. 200 crores to a PE fund, does the regulator not need to know who actually this money belonged to?”