As part of its probe into over 900-point flash crash in market benchmark Nifty last October, Sebi is investigating whether there were any technical lapses and system-related issues on part of the stock exchange.
The regulator, which is already working on new guidelines to avoid repeat of such incidents, is also investigating whether the flash crash of over 15 per cent could have been avoided or contained at an earlier stage by the exchange.
Sebi had issued a show cause notice to NSE in this case, which apparently took place because of large erroneous trades executed by a trader at brokerage firm Emkay Global.
NSE, which has already taken action against the broker, has submitted its reply to Sebi's show-cause notice and the probe is continuing, sources said.
When contacted, an NSE spokesperson said that the reply has been given to Sebi, but declined to comment any further.
"We have sent our detailed responses to Sebi on this matter.
"The process is underway. We can not comment till it is completed," the spokesperson said.
Sources said National Stock Exchange has maintained its stand that the flash crash took place due to a gross negligence on the broker's end and the exchange had followed all the rules and regulations on circuit filters, which get triggered by any massive fall in the benchmark indices.
Meanwhile, Emkay has also approached the Securities and Appellate Tribunal after the National Stock Exchange refused to accept its request for annulment of erroneous trades it carried out on October 5, 2012.
SAT will hear the appeal next on July 23.
These erroneous trades had led to a massive plunge of over 15 per cent in the NSE's benchmark index Nifty, prompting a temporary halt in overall market trading.
Emkay had to bear the losses, amounting to about Rs 51 crore (Rs 510 million), caused by this trade, but the brokerage firm later requested for annulment of the trade terming it as a one-off error.
These losses are much higher than the entire market value of Emkay Global.
Sebi has sought to know why a circuit filter was not triggered at the level of a 10 per cent fall in the index, which requires the market to be halted for an hour.
According to sources, NSE has told the regulator that the market was not halted for an hour because there was no impact on other market segments, or other exchanges and the fall was a result of an erroneous trade, not due to any news flow.
The exchange was of the view that halting the market for one hour due to an erroneous trade would have set a wrong precedent and it was anticipated at that time that the index and the overall market would return to normally in a short period of time, sources said.