MC Exclusive: Traders with shining strategies moonlight for multiple brokers, manage prop accounts

An NISM certificate’s details is linked to one brokerage, so these traders use NISM certification of others to access prop accounts of the other brokerages.

With profits becoming hard to come by, people with successful trading strategies are being hired by multiple brokerages to manage their proprietary (prop) trading accounts.

This is an illegal arrangement because prop trades can only be made by National Institute of Securities Market (NISM) certified employees of a brokerage, and since they are employees of one brokerage, they cannot of others.

“If such traders are managing multiple prop accounts, they are essentially acting as an unregistered fund manager, and this can make it hard to trace fraudulent trades to their source,” said the head of a market intermediary, who did not want to be named.

There is also the matter of skewing the field. With small and mid-brokerages struggling in an intensely competitive and increasingly regulated environment, any brokerage that breaks the rules to survive will make it harder for other brokerages to stick to the straight-and-narrow.

Also read: The shadow market for ‘proprietary’ stock trading is showing signs of unrest

The arrangement

A prop account is the account through which a brokerage trades on the exchange with its own money. These trades are placed by the brokerage’s employees through a dealer terminal.

Since there is a dearth of trading talent, brokerages often hire the services of people who also work with other brokerages.

An NISM certificate’s details is linked to one brokerage, so these traders use NISM certification of others to access prop accounts of the other brokerages, explained a trader. “It is easy to get NISM certification. There are a few ten-minute videos on YouTube and watching them will help you clear the exam, and traders can get their relatives or friends to clear these exams for them and use their certification details to access other prop accounts. Therefore, it will be hard for the regulator also to prove that one person is managing various prop accounts because there will be different NISM certification details given for each of other prop accounts,” he added.

A trader who offers such a service to brokerages said that the brokerages check the performance stats from a peer brokerage before hiring such a consultant.

Usually, such arrangements are made with algo traders, who can work remotely. Once their product is deployed by the client-brokerage, they only need to update/edit the algo with changing market conditions.

“It works for brokerages because there is a dearth of talent and this is just a way to diversify their risk,” said the trader.

Regarding concerns that such arrangements might make it harder for the regulator to trace fraudulent trades, he said that every trade is monitored by the brokerage’s risk management team. “If the brokerage is pulled up by the regulator, the brokerage will land up at the trader’s door,” he said.

That said, there is really no way for the brokerage to penalise an errant trader, who may have taken opposing positions with two different brokerages, favouring the one that gives higher leverage and more favourable terms and conditions including lower interest for unauthorised funding or higher profit sharing.

The only corrective measure available would be exclusion. That is, the shortchanged brokerage spreads the word so that  others don’t hire this errant trader.

But could such traders influence stock prices?

The trader told Moneycontrol that the largest funds managed by such traders are in the range of Rs 500 crore. But other market insiders told Moneycontrol that there are algo traders who manage funds of over a thousand crore.

Also read: MC Investigates: Prop brokers use the hawala route to receive payments for illegally renting out terminals

Regulatory gaze

The market regulator is already concerned about various illegal practices involving brokerages’ prop accounts and has started monitoring these more closely, said a brokerage head, on condition of anonymity. But, the bigger area of concern for the regulator seems to be around brokerages renting out their prop accounts to retail traders, who lap it up for the leverage and the tax benefits such arrangements offer.

“The regulator is considering geotagging to trace the origin of prop trades, but that may not be a foolproof solution,” he said.

That is, if trades for multiple prop accounts originate from one location (latitude and longitude coordinates) then the regulator can look at such trades more closely.

SEBI’s annual report for 2023-24 had mentioned geotagging under the regulator’s attempt to streamline processes.

It said, “In the coming year, SEBI plans to implement a geotagging solution to strengthen its enforcement.”

But the brokerage head said that these traders-for-hire can use technologies similar to virtual private networks (VPNs) to camouflage their location.