More than 90 brokerages, including the top names in the industry, have been questioned by the market regulator regarding their association with algo-marketplace Tradetron, according to market sources.
Tradetron is one of the many marketplaces that are not regulated by the Securities and Exchange Board of India (Sebi) and features trading strategies devised by various entities. Sebi has asked the brokerages to explain why their partnership with the platform should not be seen as a violation of an earlier circular, in which the regulator raised concerns about unregulated platforms mis-selling algorithmic strategies by promising high returns.
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According to market sources, IIFL Securities, Angel One, ICICI Direct, Kotak Securities, Motilal Oswal Securities, Upstox, Sharekhan and Nirmal Bang were among those listed as 'partner brokers' on the platform. Moneycontrol reached out to these top brokerages and Tradetron for their responses, and none of them have sent any comments so far.
Two of the brokerages Fyers and Alice Blue, which were listed as partner brokers and which received the Sebi communication, told Moneycontrol that the usage of the term “partner” by the platform is wrong since there was no partnership with it. After the Sebi communique, Tradetron’s page with the list of partners has been taken down.
Director of Alice Blue, Rajesh K said that Sebi had merely asked for a “clarification” from the brokers but, to be on the safe side, the brokers asked for the page to be taken down till the clarification is provided.
What’s the notice about?
The notice seen by Moneycontrol and sent to the brokerages from Sebi asked how their being listed as a partner of the marketplace and their referral links for opening accounts being shared on Tradetron is not a violation of a rule given in a circular issued on September 2, 2022. The circular (SEBI/HO/MIRSD/DOP/P/CIR/2022/ 117) titled “Performance/return claimed by unregulated platforms offering algorithmic strategies for trading”.
It was issued after the regulator was made aware of “unregulated platforms are offering algorithmic trading services/strategies to investors for automated execution of trades”.
The circular stated, “Such services and strategies are being marketed with ‘claims’ of high returns on investment. Further, ‘ratings’ have been assigned to the strategies, which could lead to investors being lured by such claims. This may amount to mis-selling of such services and strategies to investors.”
Sebi stated that it had come to its notice that stock brokers were providing algorithmic trading facility to investors through such platforms. To protect investors, the regulator had said that stock brokers who provide services related to algorithmic trading should not “directly or indirectly make any reference to the past or expected future return/performance of the algorithm; and/or” and “directly or indirectly associate with any platform providing any reference to the past or expected future return/performance of the algorithm.”
Simply put, the brokers should not talk about returns generated or returns expected from an algo, and should not associate with anyone who does that.
Alice Blue’s Rajesh K said that Tradetron was showing past performance of the strategies before the circular. “After the circular, brokers told the platform that the terms in the circular have to be implemented otherwise we won’t associate with you. After that, all of such data (past performance, back-tested data, etc) has been removed.”
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However, this reporter has seen the platform’s strategies’ description carrying details about backtested data and expected returns till a few months ago, which is months after the Sebi circular.
As of now, the strategies displayed on their marketplace page do not carry backtested or return percentages but come with a disclaimer: “Tradetron does not display any information about returns or profit of any strategy. The responsibility of all content in description of strategies solely lies with the creator of the strategy.”
The number of strategies displayed on Tradetron’s Strategy Market has dropped significantly.
Clever workaround
Tradetron’s content creators, who continue to be enabled by the platform, have found a clever workaround.
Their pages on algo strategies—still running on Tradetron—display links to their other social-media channels like those on Twitter or YouTube. On these social-media channels, the creators share their strategies’ past performance and expected future returns. That is, instead of putting the data directly on Tradetron, they have moved it just a link away.
Links to these strategies, though running on Tradetron’s platform, are not listed on Tradetron’s Strategy Market. These links are shared by the creators on their social-media channels.
Sonam Chandwani, Managing Partner at KS Legal and Associates, said that brokerages partnering with unregulated platforms could be seen as a violation of Sebi guidelines because of the risks such partnerships expose investors to.
"If brokerages are partnering with an unregulated entity like Tradetron, it might mean that the algorithmic strategies being employed are not subject to the same level of oversight and risk management that regulated entities are required to have. This could potentially lead to market manipulations, provide unfair advantages to certain investors, or result in mis-selling to investors promised high returns that might not materialise," she said.
"Moreover, unregulated platforms often lack investor protection mechanisms like insurance or compensation schemes that regulated platforms offer," she added.
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