Retail Algo Trading Turning into a Scam?

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Retail algo trading is also known by the names of automated trading, algorithmic trading, robo trading, system trading and so on. It basically means to authorize a software to trade in stock market on your behalf, without any manual intervention. The software follows its own set of rules to make buy and sell trades in your account. Such software promises quick profits through their strategies, which are the set of rules. 

These days, most stock brokers have opened their API for general public, so that startups can use to build innovative products. An API stands for Application Programming Interface. It is basically a medium to connect to broker’s system for stock market trading, programmatically through any software. For example, you can even use spreadsheet in your computer for placing orders with your broker, if the spreadsheet is integrated with broker API.

Growth in Retail Algo can be estimated from the number of brokers exposing API to retail traders. In 2017, hardly 5 brokers were providing API including Zerodha and Upstox. In 2020, the number went up to 30. Right now, more than 100 brokers are providing API facility. 8 out of top 10 stock brokers in India are providing API facility, including ICICI Securities.

According to Securities and Exchange Board of India (SEBI) annual report for fiscal 2021, the algo trades in cash segment account for over 82% in NSE and 70% on BSE.  We refer algo trading as ATS (short for Automated Trading System) which includes a strategy for automatic buy-sell in stock market.

Algo Trading is often advertised as an elixir for financial freedom. For example, TradeTron, the famous marketplace of algos, has many algos claiming that you can earn 10% or more profit every month consistently. So, a retail investor can just open account with TradeTron recommended brokers, and the complete care of share market trading is taken care by TradeTron itself. You do not even need to login daily to TradeTron to keep your algos running. Just put money in margin account and forget. Obviously, something which promises to make money so easily, will sound fishy to a vigilant investor rather than sounding cheesy.

Other platforms like Stoxxo allow anyone to become a portfolio manager overnight. Stoxxo allows multi-client fully automated trading, with multiple brokers, without even requiring daily login.

While this new technology was being celebrated for some time by traders and software developers alike, it is now raising eyebrows. Since anyone and everyone can build any type of trading software using an API, such technology does not follow any regulations. Ms. Sucheta Dalal, published an article “Why Is SEBI Reluctant to Regulate Retail Algos”. SEBI is the regulatory body in India for stock markets. A book by an investor called Utsav Kapoor is also doing rounds on the internet called Retail Algo Trading Scam. The book presents detailed, technical discussion claiming that retail algo trading is a massive scam.

An intriguing point here is the API policy of stock brokers mentions that the API should not be used for automated trading. Yet, all algo trading software openly claim to provide fully automated trading. It is like a warning on Beer bottles that it should not be sold to anyone younger than 16 years. Yet, the Beer is being sold to anyone and everyone without any identity check.

Angel Broking and Alice Blue are two brokers who provide their marketplace of algo services just like TradeTron. Most Brokers advertise algo trading mostly via there referral partners. The Marketing Partners, Channel Partners, Sub-Brokers and Authorized Person who take brokerage share from stock broker are collectively referred as "SB", because algo gives full-power like a traditional sub-broker. SB are professionals and also often well versed with technology. The retail algo trading malpractices are carried out by a cartel of Brokers and SB.

SEBI regulation for Sub-broker or Authorized Persons, do not allow them to handle client securities; it basically requires that the investors should initiate trades. A Broker is not allowed to execute a trade in Client’s account just for the sake of brokerage. These SEBI regulations pose a problem for greedy brokers who want to push clients for trading. 

Algo Platforms with multi-client trading feature is a easy solution for greedy brokers. The algo platform allows on a single device (laptop, tablet, mobile) multiple trading accounts, just like a dealer, to incentivize SBs. Some ATS like Tradetron do it slyly calling it "multiple deployment", while some ATS like Stoxxo do it openly. A Sub-broker or AP can easily execute traders for the sake of brokerage alone because complains against them can be easily managed. But as corporate greed goes, enabling Sub-brokers and Authorised Persons for handling client securities is not enough. Brokers want to engage all sorts of Partners; basically, anyone who can bring brokerage for them. ATS is again the perfect answer with features for multi-client, multi-broker and auto-login. The ATS enables all SB not just to bring new clients, but also generate brokerage in their accounts by executing completely automated trades through separately sold algo strategies.

Selling ATS via SB has multifold advantages. First, Brokers cannot provide automated trading without NSE approval; however, the SB is often an unregistered entity so Brokers cannot be brought to law immediately. Second, if a client complains, Brokers will come with clean hands saying it is client responsibility for choosing such an ATS; the dealing being with a third-party not the Broker. Third, these ATS can easily do brokerage generating activities like bogus financial advisory, churning of trades, spoofing prices of certain stocks, which the Broker is scared to do directly.

Mr. Umesh Ranglani, who has been SB of MasterTrust since 2013 saw the ATS sector booming and launched Tradetron in 2020. Mr. Rajendran, an SB with multiple brokers, launched AlgoMojo in same year. Almost all ATS providers in India are SB of one or many Brokers. Mr. Rachit Seth is an SB of Angel Broking and was nicely rewarded when he launched Stoxxo platform because Angel Broking advertised Stoxxo full throttle. This explains why Brokers and SB have created a cartel to advertise unregulated retail algo trading. With how many brokers has TradeTron partnered? it is impossible to tell this unless tax sleuths raid bank accounts of Mr. Umesh Rangalni and his associates; because, SB can be taken on the names of friends and family or even employees.

Until a SEBI order comes to regulate algo trading, investors are requested to be very careful about manipulations via algo trading. It is very easy to be entrapped in fictitious financial advisory in the form of retail algos, which are advertised strongly by bother brokers and their innumerable marketing partners. 000

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