MC Exclusive: Dabba-trading platform TradeX offers rewards to ‘sub-brokers’ to bait loss-making clients

This reward system can be baffling at first glance. But, on understanding how the platform's product contracts-for-difference (CFDs) work, the reward system can make perfect sense.

With these products, the platform's clients are essentially taking a bet in which the counter party is the platform. The clients of course do not know that.

Since the platform is the counterparty, the platform earns every time the client makes a loss. Therefore, the platform is offering to give a share of its earnings, which is a percentage of the loss that a client makes, to the sub-broker or the agent.

The agent is thus being incentivised to target gullible investors. The more gullible  the investor, the greater the agents' reward.

The recruitment message starts with “Introducing brokership of net loss 5% under TradeX.LIVE”. It goes on to say that the sales agents/sub brokers must find at least five clients to get a “sub-broker panel” and that they will start getting paid commissions after they get ten active clients. It then says that they will get five percent of the losses that clients make and that this commission will be credited on the first Saturday of every month.

The agent is allowed to either withdraw the amount or trade using it as capital on the platform. The message encourages them to work hard to earn more, and ends asking them to give their name, email ID, phone number and terms of deal.

Mechanics of CFDs

So, how does the platform become the counter party in CFDs?

CFDs are instruments that allow a notional trade. They are a way to do dabba trading. That is, no one really owns an asset, they are just betting on the price movement of the asset.

Platforms such as TradeX usually charge zero brokerage because the objective is to get people to trade more and increase the odds of making more losses and earning more for the platform.

CFDs trace their origin back to brokers realising that traders/investors are wrong about their bets on forex or commodity price movements most of the time.

In a December 2020 blog entry, Zerodha's founder Nithin Kamath had explained this pretty well.

CFDs were initially conceived to give investors access to assets they otherwise could not trade in. For example, if one wanted to invest in a US stock, he/she would need an account in a brokerage that is registered in the US. But brokerages found a way around that, by letting investors take that trade through the brokerage's account registered in that jurisdiction.

At this point,  brokerages were making money on a small spread between the price that was being charged by the brokerage's CFD platform and the actual price of the underlying asset in the particular market (like the US market).

Then the platforms started realising that the traders/investor were wrong with their bets a majority of the time, according to Kamath's blog. Therefore, the brokerage platforms thought of being the counterparty to the traders/investors bets, rather than actually investing in the underlying asset.

Kamath wrote, "The bet essentially was that a large group of traders on an overall basis would lose money trading, so the CFD platform can win by just being opposite to the entire group of traders. So CFD, which started off to give easy access to various markets now became what is called a closed-loop CFD platform or essentially a casino where the house wins when the traders lose."

Also read: MC Investigates: Online dabba traders go all out to recruit sub-brokers, offering clients even 500x leverage

That's why TradeX is rewarding its sub-brokers/sales agents a percentage of the losses that their clients make. The platform earns when the client loses.

It could even be argued that it is fair game, that one person would make a profit when another makes a loss. Except, such platforms can even rig prices—since the platforms are flashing the price feed--and make investors believe that they are in losses when in fact the investors may have made a profit.