Retail Algo Trading is an illegal practice in which retail investors are lured to authorize a computer program, to create buy and sell orders in a fully automated manner, without any manual supervision. The computer program automatically generate orders and sends them to exchange, and also manages current positions/orders for liquidation or scaling-in. The set of rules used to generate orders or modify them is called a Strategy or Algo. In this article, ATS denotes an un-approved and illegitimate Automatic Trading System, which also has an inbuilt strategy recommended as a financial advice.
Tradetron, the biggest player in ATS, is a company registered in US to dodge Indian laws, and currently has 350 algos in its public marketplace out of which none are approved or audited. India’s largest broker Zerodha, acknowledges that Exchange approval is required for Algo Trading, but also facilitates it without any approval system. The scam is mostly operated by Trading Members of National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX). For the purpose of brevity, this article covers aspects only related to NSE Trading Members.
Technical Aspects of Operation
1. NSE Trading Members (TM) recommend APIs to investors which do not require manual authorization for sending each order to market. As per NSE norms, any application from which orders originate should be approved by NSE before recommending to investors. However, TM do not put an approval system in place for APIs. TM do not put the most basic form of approval -asking screenshot from investors about the ATS they are using – to disallow violating ATS. On the contrary many TM recommended ATS openly to investors, while some recommended ATS cunningly through their Sub-brokers.
2. The Marketing Partners, Channel Partners, SubBrokers and Authorized Person who take brokerage share from TM are collectively referred as “SB”. The TM facilitates SB to provide ATS, so that TM can dodge SEBI regulations for Algo Trading. Some brokers ask SB to sign-up as Partner for brokerage sharing, to dodge SEBI compliance for SBs.
3. The APIs need login credentials given by TM for authentication before sending orders. However, the ATS programmatically save the login credentials and auto-login daily into investor accounts, to discourage investors from actively supervising orders placed in their accounts.
4. The ATS allows on a single device (laptop, tablet, mobile) multiple trading accounts, just like a dealer, to incentivize psedo-portfolio managers. Some ATS like Tradetron do it slyly calling it “multiple deployment”, while some ATS like Stoxxo do it openly. This violates SEBI regulations that any SB is not allowed to handle client securities.
5. The ATS allows as aggregating platform for TMs in which each order can be routed to different TM. This is against NSE norms because it does not keep networks separate of different TM.
6. The ATS also dole out financial advice, with promises 15% or more return per month to investors. This is again violation of SEBI mandate that only a Registered Advisor can provide financial advice.
7. The TM leaks out clients’ stocks transaction data (buy/sell orders) to ATS, because all orders are generated and managed from third-party ATS
server only. This against SEBI’s Code of Conduct for Brokers.
8. The ATS does not make any disclosure about their proprietary trading, even though acting in the capacity of a financial advisor.
Financial Aspects of Operation
1. At any point of time, 80% of investors are losing money but 20% are making money by sheer randomness. Since all trades happen from ATS servers, SB has information which investors are making money. SB takes testimonials from these 20% investors, then use testimonials for marketing algo services. According to the recent report published in a book(Retail Algo Trading Scam by Utsav Kapoor), Retail investors have been cheated to the tune of 1000 crores in Algo Trading scam in last 3 years. This scam is led by a cartel of Brokers, and Sub-brokers who operate as Algo Providers (ATS).
2. These ATS makes money from platform subscription fees (250 to 15000 per month).
3. The ATS makes money from brokerage, by also operating in the capacity of SB. SEBI regulations prohibit one person for being SB with more than one TM. This rule is easily dodged by registering as SB in the name of friends, family and colleagues. Mr. Umesh Ranglani, Tradetron’s founder, is a SB of MasterTrust. MasterTrust sends recommends Tradetron to investors, and the brokerage generated comes back to MasterTrust. Since all real-time transaction data is leaked to SB from Broker, and all orders and trades are managed from ATS server, the SB has liberty to indulge in churning, front-running, ramping and other market manipulation.
4. The ATS strategies may automatically trigger orders from 1000s of investor accounts for rigging or spoofing stock prices. This allows them frontrunning client orders or taking counter positions depending on the price trend triggered by the strategy.
5. ATS also makes money in proprietary trading accounts from the top 1% strategies which are genuinely profitable and submitted by retail investors to these platforms for execution. The investors cannot suspect because any disclosure is not made by ATS.
The most serious impact from algo platforms is the abhorrent theft of sensitive data. These days almost all algo platforms are server based, and any trades done by investors is initiated and managed from these third-party servers. The investors login credentials, stock transaction data (buy/sell orders) and funds deposited to broker are available in real-time to the third-party algo provider. Using simple machine learning techniques, it is easy to find behavioral patterns of the investor. Applying simple machine learning on stock transactions reveals weak spots of the investors; what makes them sway in greed and fear; what makes them increase trading volume, what makes them add funds to trading account, and the limits of fraud which make them become suspicious or complain.
Actually, manipulations by algo platforms would not have been possible if client transaction data was secured. The gravity of protecting this data is so important that SEBI mentioned it decades back, before the internet and computers. In SEBI’s Brokers Code of Conduct, it is mentioned in “Duty to the Investor”:
“Breach of Trust: A stock-broker shall not disclose or discuss with any other person or make improper use of the details of personal investments and other information of a confidential nature of the client which he comes to know in his business relationship.”
Yet, with shock and hate, we have to contend with fact the Brokers are giving full control over their clients account to any third party algo provider.
The data theft is the chief mechanism for enslavement of investors in the algo scam. Slavery is a very serious word which connotates denial of fundamental rights. Modern forms of slavery are sex trafficking, bonded labor, forced child labor or domestic servitude. The master has the idea of “ownership” as actual control of the slave, rather than the slave being a legally owned object. In slavery, another human being is considered as a “property” or “thing”. The “independence” of slaves is taken away from mind and spirit. Control of the slave comes from supervision. Supervision allows master to act against the actions of slave. Supervision also allows to the master to plan against resistance by the slave.
We cannot expect such ethics from even India’s largest broker. Until SEBI order comes, investor self-awareness is the only method to protect one’s money from the scam.
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