MUMBAI:
The Securities and Exchange Board of India (Sebi), the regulatory authority overseeing capital markets in India, has recently taken significant action by issuing show-cause notices to over 120 stockbrokers due to their association with the algo-trading platform Tradetron. This move underscores Sebi’s commitment to enhancing regulatory compliance within the rapidly evolving landscape of algorithmic trading.
Why has the regulator issued the notices?
The notices stem from Sebi’s findings that Tradetron was promoting algo trading strategies that guaranteed assured returns, which is explicitly prohibited under a Sebi circular issued in 2022. This circular clearly states that stockbrokers are forbidden from associating with platforms that offer any guarantees of returns on investments.
The circular mandated that “Stockbrokers who are directly/indirectly referring to any past or expected future return/performance of an algorithm, or are associated with any platform providing such reference, shall remove the same from their website and/or disassociate themselves from the platform providing such references within seven days from the date of this circular.”
In its investigation, Sebi discovered that 119 stockbrokers maintained their application programming interfaces (APIs) linked to Tradetron despite previously assuring the regulator that they had cut ties with the platform.
Furthermore, Tradetronโs website was found to include referral links that encouraged users to open accounts with specific brokers while offering trading strategies at discounted rates, raising further concerns about compliance.
How did Tradetron earn money via stock brokers?
Upon reviewing Tradetron’s operations, the regulator identified that algorithm developers were monetizing their algo strategies through Tradetron by charging subscribers either a fixed monthly fee or a profit-sharing arrangementโor a combination of both. As a software-as-a-service (SaaS) entity, Tradetron generated revenue from subscription fees for access to its algorithmic trading functionalities. These services enabled users to execute automated trading operations without needing extensive coding knowledge.
Between 2020 and 2023, Tradetron reportedly charged 86 stockbrokers a one-time integration fee of โน1.21 crore for connecting their trade APIs. This integration facilitated a seamless trading experience, but it also led to questions regarding regulatory adherence among involved brokers.
Which stockbrokers have received the notices?
A total of 122 brokers have been issued show-cause notices by Sebi, requiring them to justify why they should not face enforcement action. Some of the well-known brokers implicated include Aditya Birla Money, Arihant Capital Markets, Anand Rathi Share & Stock Brokers, Angel One, Ashika Stock Broking, Bonanza Portfolio, Choice Equity Broking, Geojit Financial Services, HDFC Securities, Hem Securities, ICICI Securities, IIFL Securities, JM Financial Services, Kedia Capital Services, Kotak Securities, Master Capital Services, Paytm Money, Phillip Capital (India), Profitmart Securities, Prabhudas Lilladher, Samco Securities, SMC Global Securities, Sharekhan, Swastika Investmart, and Tradejini Financial Services.
According to sources, a show-cause notice seen by Mint conveyed that brokers would have a period of 14 days to respond to the regulator’s inquiries.
What do they have to say?
In response to the allegations, a representative from one broking firm, speaking on the condition of anonymity, stated that several brokers, including his firm, had discontinued their integration with Tradetron six months prior to the issuance of Sebi’s circular. However, Tradetron had not updated their records to reflect these changes.
The representative also revealed that an email from Tradetron indicated that their firm had been barred from using Tradetron’s services due to non-payment of fees, complicating the situation further.
