BackStock trading games are fun. Are they legit?
Are such competitions akin to gambling or do they enable healthy trading behaviour? These games may not last very long, as Sebi plans to curtail them
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Priya Badiwal recently won the Women’s League and Student’s League at the Indian Trading League (ITL)—a stock, derivatives and commodities trading competition. In a YouTube testimonial published earlier this month, Badiwal said that the competition motivated her to do better (in securities trading) and made her feel valuable.
However, the Securities and Exchange Board of India (Sebi) may go on to restrict such competitions and leagues that relate to the securities market—as proposed in its consultation paper on amendments to the Sebi (investment adviser) Regulations 2013. Trading competitions, where real securities are traded, take place globally but are uncommon in India’s domestic broking industry. There are several trading competitions in India where virtual money is used: such as Beat the Street, which is hosted by the Indian School of Business during its annual festival.
Kamlesh Rao, chief executive officer, Kotak Securities Ltd, explains these games: “Conceptually you can’t play with real money. We are in the process of creating a virtual game to function as a real market. Virtual games are a good way to learn about the market."
When we consider the domestic market, ITL is a good example where contestants trade with real securities. The format is owned by Samrudhhi Finstock Ltd, which is further owned by SAMCO Ventures Pvt. Ltd. A senior executive from another broking company, who preferred not to be named, said that when trading competitions take place with real money, they are akin to gambling , which is not desirable.
Explaining ITL’s point of view, Jimit Modi, chief executive officer, SAMCO Ventures, said, “Financial competitions successfully operate in many countries and help in development and financial inclusion. They are a part of the education process...we will make our formal representation to Sebi, requesting them to re-consider the proposal."
The cause for concern
The big problem is that the entities organising such activities may have conflicts of interest and there is no regulatory control over the game.
In the second season of ITL, which started May this year, there are six leagues. The winner (declared daily, weekly, monthly, quarterly and annually) would have generated the highest returns, net of costs. While contestants play to win, the broker earns on the trades they do. In the case of ITL, a conflict exists because players have to open a trading account with SAMCO Securities (also owned by SAMCO Ventures)—a discount broker that charges a flat fee per trade.
Another concern: the prize money can goad participants to over-trade, just to win on that day, week or month. In ITL you can win with just one winning trade which ranks you on top with the returns you make, else you can continue trading more. ITL has reduced the maximum prize money for a single win from Rs1 crore in the first league to Rs10 lakh now. Another danger is that such games can create the view that stock markets are all about winning. The fact is, stock trading is a zero-sum game, where everyone cannot be making profits: if someone is winning, another must be losing.
And, there is no recourse with Sebi for when things go wrong in such competitions. Reportedly, in December last year, stock exchanges communicated to brokers (at Sebi’s behest), that they should not sponsor such competitions, and organisers for such competitions should get written consent from the players that in case of a dispute, they would not be entitled to dispute redressal mechanism under Sebi’s investor protection schemes.
The other side
ITL, on its part, says the game promotes investor education. Its website showcases gold, silver, and bronze medals for players who follow the ‘right’ trading techniques. Yellow and red cards are invoked when errors are made. Players also get educated on downside of trading tactics like over-concentration in one stock or trading in penny stocks (which dis-qualifies a player).
At the time of signing up, the players are told of SAMCO Securities’ conflict of interest. And ITL does not recommend stocks or give tips on when to buy or sell. The stock selection and game strategy is left to the players.
There could be a perspective that the competition structure induces a participant to learn better trading techniques. However, should real money be put at risk to learn these techniques?
Mint Money take
Despite incidental investor education and a full disclosure of conflict, should brokers be allowed to hold such contests, which may be perceived as a lottery by some? Just as the prize money can be considered an inducement to trade, can one consider discounts on initial public offerings (IPOs) for retail investors as undue inducement? What about schemes that return brokerage fees when a trader earns above a pre-determined return hurdle? Or internal revenue contests run for relationship managers by brokers?
There are many practices which can wrongfully induce investors. In putting forth this proposal, the market regulator’s attempt may be to draw a line between what’s acceptable and what’s going too far in soliciting business through inducements like competitions. The regulator’s intention clearly is towards investor protection. However, biased strategies to induce people to trade can remain despite banning one format or another.
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