SEBI Issued Show Cause Notices To 120 Stockbrokers.

SEBI has issued show cause notices to over 120 stockbrokers, many of whom are big-ticket brokerage houses, for their alleged involvement with the algorithmic trading marketplace Tradetron. This is part of a broader search of the platform and other similar companies centred on algorithmic trading exchanges, displaying that the regulator is increasing scrutiny of the fast changing practices of automated trading techniques.

What is prominently itching SEBI is the that Tradetron is flashing algorithmic trading strategies on its website, promising investors high returns with promising guarantees to them. This is not there in the book of law according to the SEBI circular dated September 2, 2022, against misleading advertisements and preventing risks to investors.

The circular dated 09/2022 clearly says that stockbrokers cannot refer directly or indirectly to past or expected future returns of algorithms. Moreover, it ordered brokers to dissociate from the platforms that provide such references, in 1 week from the date of issuance of the circular. So one can say this is one of many efforts SEBI was taking forward to address the emerging headache of unregulated platforms dealing in algorithmic trading services and strategies with retail investors.

What makes it tricky for now is that these 120 brokers had given undertakings to SEBI earlier, wherein they asserted they stopped dealing with trading platforms like Tradetron. The latter claims to show strategies which assure promising returns. However, SEBI found out that in reality all brokers were very much in business with trading platforms.

Who All Got The Notice By SEBI?

The recipients of the notice by SEBI are some of India’s most prominent brokerage players, including diversified Aditya Birla Group’s part, Aditya Birla Money, and well-known Arihant Capital Markets for retail and institutional broking services.

Anand Rathi Share & Stock Brokers, which boasts high presence in the wealth management space.

Angel One is the renamed Angel Broking, one that has achieved huge leaps in digital broking. Ashika Stock Broking and Bonanza Portfolio are some other companies which have found their niches in the broking industry and are part of the list that SEBI has served notices upon.

The notice also found its way Choice Equity Broking and Geojit Financial Services, which also deliver to substantial retail client bases pan India. Another arm of HDFC Bank, the largest domestic broking house in the country has not been left by this process of probe, either.

Other major players like Hem Securities, ICICI Securities, a broking subsidiary of the private sector ICICI Bank, and IIFL Securities from IIFL Group, which runs a comprehensive array of financial services, have received the notice too.

The JM Financial Services is a firm that has great strength in the area of investment banking and institutional broking. 

The Kedia Capital Services is known for derivative trading. Kotak Securities, the group company’s broking venture is yet another big name on the list.

Two more significant players, Master Capital Services which hails from North India and Paytm Money, the investment and wealth management arm of the fintech behemoth Paytm, have also received such notices reportedly. The inclusion of Paytm Money is particularly noteworthy as the firm is relatively new to the broking space and has a tech-forward approach.

Then, there is Phillis Capital (India), the Indian subsidiary of the Singaporean financial services group, along with Profitmart Securities that is known for its algo-trading offerings.

Prabhudas Lilladher, an outfit with a legacy in the Indian financial markets, spanning several decades, is also in the list of those receiving notices.

Samco Securities, the discount broking model champion, and diversified financial services firm SMC Global Securities are some of the more notable names on the list. Sharekhan, a BNP Paribas Group firm, and Swastika Investmart, known for its research-driven strategy, are also on the list that SEBI has served questioning notices upon.

Nitin Kamath’s Zerodha, Motilal Oswal Financial Services Ltd., 5Paisa Capital Ltd. and Bajaj Financial Securities Ltd. are some other names that are part of the list.

Such a long list of brokers-which would include the traditional full-service brokers and the new, technological drivers-such a long list would indeed go to indicate the wide reach that the probe of SEBI has taken. That would suggest that the regulator is casting a very wide net and is going to ensure compliance from across the spectrum of the broking industry, including irrespective of their size, age, or even sophistication of the technology that these firms employ.

Why Did SEBI Issue The Show Cause Notice?

As the regulator found out, the brokers continued to maintain their API with Tradetron, which should have been turned off in light of the above declarations. This effectively translates to Tradetron being a gateway which enables it to interface and connect algorithmic trading strategies to the broking platforms. This has effectively translated to logging into Tradetron and setting up a trade on the strength of algorithmic trades generated by the platform and getting those orders executed through the associated broking platforms.

The financial deal between Tradetron and the brokers further complicates the situation. Information presented by Tradetron before SEBI states that out of the 120 broker accounts under consideration, 86 had paid for API integration, while 33 had not paid for API integration. However, it has come to light that a total of 122 brokers continued to have their API integrated.

It emerges that in some situations, Tradetron’s business strategy included a one-time charge for certain integration services from specified brokers. This financial arrangement calls into question the incentives that brokers will face in order to remain linked to the platform in the event that they are investigated by relevant regulatory organisations.

What is particularly alarming for SEBI, though, is the perception that the brokers are not pulling out their complete ties with Tradetron even after an order by the regulator earlier. The platform claimed that only five brokerage firms had sought the disconnection of their APIs following the first interference from SEBI. In fact, not even those requests led to disconnection as the APIs of these five brokers continued to remain integrated with the system of Tradetron.

It is not the first move by SEBI on Tradetron and related brokers. Over 90 brokers have been questioned by SEBI in the past this August. At that time, the regulator had sought explanations as to how the association of the brokers with Tradetron did not end after the September 2022 circular, titled – “Performance / return claimed by unregulated platforms offering algorithmic trading strategies.”

This circular by SEBI was issued in the month of September 2022, as a response to an increase in the awareness regarding unregulated platforms that were offering algorithmic trading services and strategies to investors at times with automated trade executions. The market regulator felt that such platforms were marketing their services based on high potential returns and rating assignment of several strategies. SEBI considered such a practice as potentially misleading investors through the means of mis-selling services and strategies.

Regulatory actions and the inquiry now reflect the problems faced by the financial regulators as far as keeping pace with the technological advancement in the trading business is concerned. Algorithmic trading, for instance, offers potential efficiencies with fewer errors on the part of human beings but introduces new risks and regulatory concerns. Assured returns, especially those derived from unregulated platforms, raise red flags to the regulators as they go about maintaining integrity in the markets and protecting the interest of investors.

SEBI’s efforts also target due diligence and compliance on the part of licensed stockbrokers. The undertakings filed with SEBI and the practices of these brokers deviated from each other in all directions, raising questions about the efficacy of self-reporting and the need for more robust mechanisms to ensure oversight.

This acts as a lesson to know better with regard to retail investing and not to get attracted to any algorithmic trading firm that promises assured return.

Further investigation will likely give rise to further regulations or policy changes. SEBI may consider more stringent controls, including broader monitoring as well as regular and transparent disclosures from brokers about their arrangements with technology service providers. Increased pressure is also expected for more definition of acceptable marketing practices over algorithmic trading strategies.

This show cause notice by SEBI to more than 120 stockbrokers in relation to their association with Tradetron presents a significant moment in the dialogue between financial innovation and regulation in India. The changing nature of the financial markets is increasingly linked to technological change; therefore, clear regulation, strict enforcement, and responsible practice on the part of all market participants become even more important. This case may build foundation for major rules for the laws revolving around algorithmic trading platforms and other services in our country, defining the country’s future financial technology environment.