Algo Scam Details by Utsav Kapoor
Table of Contents:
A. INTRODUCTION
B. MECHANISM OF OPERATION - TECHNICAL ASPECT
C. MECHANISM OF OPERATION - FINANCIAL ASPECT
D. SIZE OF SCAM
E. METHODOLOGY OF SCAM EXPOSURE
F. MY PERSONAL STORY
A. INTRODUCTION
Retail Algo Trading is a 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. Tradetron, the biggest player in this scam, 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 (Ref-1). India's largest broker Zerodha, acknowledges that Exchange approval is required for Algo Trading (Ref-2), but also cunningly 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 prima-facie report informs only about the NSE Trading Members who are involved in scam.
B. MECHANISM OF OPERATION - TECHNICAL ASPECT
(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 a approval system in place for APIs. TM did 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. (Ref-3)
(2) The Partners, Sub-Brokers 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 signup as Partner for brokerage sharing, to dodge SEBI compliance for SBs.(Ref-4).
(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. (Ref-5)
(4) The ATS allows on a single device (laptop, tablet, mobile) multiple trading accounts, just like a dealer, to incentivise psedo-SBs. 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 should be registered with SEBI. (Ref-6)
(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 keeps networks separate of different TM. (Ref-6)
(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. (Ref-7)
(7) The TM leaks out clients stocks transaction data (buy/sell orders) to ATS, because all orders are generated and managed from ATS server only. This is against NSE norms for not following a approved network diagram for order placement.
(8) The ATS does not make any disclosure about their proprietary trading, even though acting in the capacity of a financial advisor.
The above violations, with many other, help them to execute financial aspects of scam.
C. MECHANISM OF OPERATION - FINANCIAL ASPECT
(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.
(2) These ATS makes money from platform subscripttion fees (250 to 15000 per month). (Ref-8)
(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. A large number of Tradetron's strategies do churning trades to extract brokerage from clients.
(4) The ATS strategies 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.
D. SIZE OF SCAM
Currently, more than 60 NSE Trading Members are recommending APIs to investors; and, more than 50 Algo Software are being recommended to investors. Between the period July 2020 to June 2021, around 5 lakh retail investors have been lured into algo trading, out of which Tradetron alone has signups of close to 1 lakh investors.
Assuming the average amount of money lost by a investor in this scam is Rs. 10000, a cumulative amount of Rs. 500 crore has been lost by investors over last 12 months alone. Most of the algo platforms were started in mid-2018 itself. Based on the growth in number of brokers recommending APIs to investors, the cumulative loss in last 3 years has been Rs. 1000 crores.
E. METHODOLOGY OF SCAM EXPOSURE
Even though I was personally cheated by ATS, active help from a NSE Auditor was taken to understand SEBI/NSE Guidelines before jumping into conclusions. Once the violations by TMs were clear, email correspondence was sent to 14 such TMs on 19-07-2021, keeping NSE/SEBI also in loop. In reply, the TMs either dissociated themselves from ATS, or ignored the email entirely. The TMs who dissociated themselves from ATS were asked why they are recommending ATS to investors. There were no further replies received from TMs even after four reminders sent between 19th July to 26th July. Notable replies are summarized below:
1. Zerodha: Dissociated itself from ATS but did not reply why it allows unapproved ATS
2. MasterTrust: Dissociated itself from ATS but did not reply why it recommends Tradetron to investors
3. Zebu: Dissociated itself from ATS but did not reply why it recommends Stoxxo to investors
4. AliceBlue: Dissociated itself from ATS but did not reply why it recommends Tradetron to investors
5. CompositEdge, RKSV, Nirmal Bang, IIFL and Angel Broking denied to reply until contact details provided
6. SAMCO, Tradewings, Arham and 5paisa did not reply at all after multiple reminders
F. MY PERSONAL STORY
I am Ustav Kapoor, a resident of Chandigarh. I lost my high paying IT job in April 2020 due to pandemic. I am IIT alumni software engineer. Life was comfortable and I just decided to learn new skills and try something higher in life. I had a decent FDs saving of 25 lakh.
This is when someone contacted me from Bangalore based company called MarketCalls. They seemed to be well placed and promised disciplined stock trading. Mr. Ranjendran, the founder of Marketcalls, appeared regularly in conferences promoted by stock brokers. I paid them aprox 1.2 lakh in course fees to learn about stock trading strategies. They later launched "advanced, high-tech, server-based " platform called Algomojo for trading. This software allowed server based algo trading without any supervision at all. As an "icing on the cake", they provided several trading strategies. I gradually lost Rs. 8 lakh in trading over next 4 months with Algomojo, additional to the course fee of 1.2 lakh.
Dejected, I was recommended on internet forums a "disruptive" app called Tradetron which will make for you 20% or more returns per month from stock market. Tradetron has duly filed US Patent for its "path-breaking" technology and is a U.S. registered company. This was another server-based app for algo trading which did not require any manual supervision.
Tradetron was more lethal than Algomojo, because it offered "strategy marketplace" by almost a thousand self-acclaimed trading gurus. Each strategy promises spectacular returns in the best of intellectual presentation to appeal any scientific mind. Tradetron's User Interface (UI) is addictive and beautiful like an online gaming portal.
Between September 2020 to February 2021, I lost over 20 lakhs with Tradetron. Overall, from algo trading my entire savings in FDs wiped out, plus additional savings from PF.
Was I foolish to lose so much money? I assumed yes. These algo platforms are commonplace and supported even by celebrated entrepreneur unicorn Zerodha. I opened account and traded with half-a-dozen brokers between April 2020 to Feb 2021, and all of them recommended algo trading. I accepted all the losses as my own mistake for not being intelligent enough to make money from stock market. This belief was triggered by educational propaganda from these algo platforms. I started searching again for IT job and joined a company with 70% of the salary from my previous job. This salary loss was due to one year gap and also being away from my job skills.
Out of interest I researched deeply and found that these algo platforms are ALREADY flouting the norms set forth by NSE and SEBI. Yet no one talks about the violations. Surprise! I was not foolish. I was cheated by these algo platforms in syndicate with stock brokers. My broker IIFL has been calling me (cold call spamming) several times to inform about another new "path-breaking" platform called Algobaba. So, I also researched about this new entrant and started to chase 14 stock brokers who promote algo platforms.
MasterTrust, Zerodha, Alice Blue and Zebu quickly replied that they do not endorse such algo trading platforms. I caught these brokers easily promoting algo services, after which they did not reply to my email. Angel Broking and AliceBlue operate a marketplace to sell algo platforms which draws lakhs of investors. So, these brokers are making money from both brokerage and algo software. MasterTrust promotes TradeTron left and right. CompositEdge, RKSV, Nirmal Bang, IIFL and Angel Broking denied to reply me until I give them my contact details. All of the 14 brokers were dumbstruck to answer my queries, even though I emailed specifically to their Compliance Officers, broker CEOs, NSE Directors (a) Mr. K Narasimha Murthy (b) Prof. S Sudarshan Ms. Mona Bhide (c) Girish Chaturvedi, and SEBI Head office and regional offices. Gill Broking, Arham Wealth, Tradewings and SAMCO did not reply even the usual disclaimer, perhaps they could understand the tone in my email that I am going to expose them. It is important to note here that Zerodha is India's largest broker, RKSV comes second, Angel Broking comes fourth, 5paisa comes sixth and IIFL comes to thirteenth largest broker in India. This gives an estimate how large is the scam of retail algo trading. Currently 50+ brokers are recommending Algo services to investors.
The current scenario with retail investors is similar to the slavery practice in the US in 1800s. Its considered normal because it’s happening everywhere. Investors like me accuse themselves for being foolish, just like Blacks used to think they deserve slavery. Even when investors “feel” they are being cheated, they are technically inadept to chase brokers. Even though I am an IITian, I could not understand why I am consistently losing money for a long time. Slaves are not killed, but rather fed minimally to make them work. Similarly, investors do not lose money suddenly on these platforms. Investors lose money slowly trying one strategy after another and purchasing one subscripttion after another.
The modus operandi of these server based algo platforms is a no-brainer. At any point of time, 80% of investors are losing money but 20% are making money by sheer randomness. Since all trades happen from their servers, they can "see" which investors are making money. They call and take testimonials from these 20% users, then use testimonials for marketing algo services. These algo services make a lot of money from their platform fees (750 to 5000 per month). The founders of all the platfroms mentioned here are sub-brokers of the brokers which promote them, so they also make money by handsome share in brokerage. Someone told me Algomojo nets income between 25-30 lakhs per month by brokerage sharing alone, being a partner with multiple brokers. SEBI regulations prohibit one person for being sub-broker with more than one broker. This rule can be easily dodged by taking sub-brokership in the name of friends, family and colleagues. Mr. Umesh Ranglani, Tradetron's founder, is a sub-broker of MasterTrust. MasterTrust sends inactive clients to Tradetron, and the brokerage generated comes back to MasterTrust. A large number of Tradetron's strategies do churning trades to extract brokerage from clients. The thousand self-acclaimed trading gurus on Tradetron are all sub-brokers who make money from brokerage and selling strategies. Web platforms further make money in proprietary trading accounts, by taking counter-positions to the tips that their strategies dole out to retail investors. And then, they make money in proprietary trading accounts from the top 1% strategies which are genuinely brilliant and submitted by retail investors to these platforms for execution. Finally, these algo platforms make money by frontrunning client orders; their strategies automatically trigger orders in 1000s of investor accounts with capacity to manipulate stock prices. Since the algo trading ecosystem in India is a cartel of brokers and sub-brokers, the brokers have no problem in sharing their clients stock transactions data (buy/sell orders) with the algo platforms.
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