Unregistered money-manager Trade 26 Research mimics legal entities to defraud investors

The sales executive said that profit would be shared in a 70:30 ratio.

If you are a novice investor desperate to make money, you could get taken in by Trade 26 Research.

This entity, which calls itself a stock advisory firm in Varanasi on its website, advertises investment ideas in stocks and commodities with various payment plans. Its website has elements such as KYC forms to fill, risk disclosures and disclaimer documents.

It even claims to be registered with the Securities and Exchange Board of India, without specifying the nature of the legal status.

Part of its disclaimer page where it says it is a registered advisor.

Yet, more worryingly, Trade 26 Research could be getting legitimacy by functioning under the umbrella of a leading, listed brokerage.

Its sales executive confirmed to this reporter that it is not a Sebi-registered research analyst or investment advisor, but it still offers stock advisory services. It is not a registered money manager but still offers to manage the money of investors, offering to operate their trading accounts on their behalf – it will take an investor’s trading account login and password and place trades through that account.

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In India, an entity must be registered with Sebi as a mutual fund, portfolio management service or alternative investment fund to manage someone’s money on their behalf. Such entities are governed by regulations that are put in place to protect investor funds and they are not allowed to transact using an investor-client’s trading account.

To function outside the purview of these regulations and get a free hand with investors’ money, some money managers don’t register themselves but offer to trade using the investors’ trading account. Investors opt for it because of the extraordinary and impossible returns promised.

Trade 26 Research promised this reporter a return of 10 percent every day. By putting in Rs 20,000, an investor can expect Rs 2,000 in return every day. That translates to 300 percent in a month and to 3,650 percent in a year!

The sales executive told this reporter that profit would be shared in a 70:30 ratio, with 70 for the investor, and added that a loss would have to be borne 100 percent, without clarifying what that meant. It could mean that a loss is absorbed entirely either by the ‘service’ or by the investor.

While all this can be brushed aside as the attempts of a small-time scamster, what is really worrying was the sales executive’s claim that it works as a sub-broker for a listed, leading brokerage. This could not be independently verified, but market insiders said this is a common practice adopted by brokerages to attract investors.

Brokerages use sub-brokers, associated partners or ‘franchisees’ to get clients/investors. They compensate such intermediaries with commissions, which include a cut in every trade the investor places.

While brokerages cannot be expected to monitor the workings of thousands of such ‘distributors’—this brokerage named by the Trade 26 Research sales executive has a strong sub-broker network—market insiders said many leading brokerages are aware of questionable practices these intermediaries employ to get business.

In this case, the Trade 26 Research executive kept pushing the reporter to open a trading account with this leading brokerage. However, getting an investor to open a trading account is not what will bring big money – it’s only the first step.

Money spinners

The big money can come in at least two ways—either by functioning as a sub-broker and collecting commissions from the main broker or by misusing the client’s account as a conduit to trade in illiquid stock options.

First, let’s look at the sub-broker way. For each trade that an investor places, a sub-broker/associate partner gets a commission from the brokerage. For this to be successful, the illegal money management business will come in handy.

The other way is to use the client’s account as a conduit. Once the investor shares the trading account’s log-in details, Trade 26 Research could trade frequently through the account.

While the investor has to pay the brokerage fee and taxes with every trade, the brokerage and its distributors or intermediaries earn money through fees and commissions. The incentive for the sub-broker is to get the investor to trade and trade frequently, and not necessarily make a profit.

Even if Trade 26 Research isn’t a sub-broker, it can earn lakhs of rupees by simply misusing the investor’s account to trade in illiquid stock options.

For this, such a ‘manager’ would sell illiquid stock options at a premium from his/her account and buy it from the investor’s account. Later, the ‘manager’ would square off his/her position by buying the illiquid option at a much lower intrinsic value.

The investor would be left with the illiquid option to square off at a loss.