Stock trading games & copy trading platforms in India?

July 18, 2020
Rainmatter

Retail participation in the stock markets across the world hasn’t been this high in a long time. Low interest rates, work-from-home giving more time and bandwidth to think about personal finance, and people looking for an alternate source of income are the factors contributing to this increased activity.

Historically, the startup community in India hasn’t focused on building products for the capital markets. Mainly because of the small TAM (Total Addressable Market) of around 70L Indians who invest once a year which makes it tougher for startups to justify high valuations. Compliance and regulatory requirements also act as a deterrent. But this rush of new investors over the last 4 months has set an expectation that the TAM can expand quite fast. While the people already investing in Indian stock markets are around 70L, there are at least 4 crore Indians who have the ability to invest. That sounds like a great opportunity, and there is sudden interest not just from startups, but also VCs looking to back companies who are going after this opportunity.

Instinctively, I guess we’d all think that the easiest way to address this audience is by bringing in elements of gamification to the stock market, where people can trade with demo/fake money while also learning how to trade. With the success of Dream11 and other fantasy leagues, the monetisation plan for this could also be the same — everyone pays a fee to play the game, the winner takes most and the platform takes a cut. Or maybe social trading where traders with good performance track records share their trades and it automatically gets copied to everyone who is following the user?

We have spoken to at least 5 startups in the last couple of months who are at different stages of building a product based on the above two ideas. I thought it would be a good idea to share with everyone what we shared with these startups — why this product isn’t feasible in India right now.

Regulations don’t allow for any competition/game/league

Check this document from SEBI from earlier this year (page 25).

No person shall organise or offer any scheme/competition/game/ league on securities or related to the securities market.

In a regulated business, you can’t do something that the regulator explicitly disallows. That said, SEBI has now opened up a regulatory sandbox where you can try getting approval for innovative ideas that can help retail investors while also growing the capital market ecosystem. But, there is another issue.

Exchange data feed cost

Exchanges have revenue from two sources — transaction costs and data feed. Internationally exchanges earn the majority of revenue from data feed. For example in the US, for the quality of data you receive on trading platforms in India for free (market depth, OHLCV, etc) you might have to pay over $15 per month. Majority of the retail trading platforms in the US give you only last traded price data — that too from small exchanges with inferior quality due to low trading volumes, who might be giving data for free to catch up with the larger ones (the US has over 12 exchanges). In India, exchanges earn mostly from the transaction fees generated from the trades executed — which is the right business model for an exchange, which doesn’t allow them to create an entry barrier for small investors.

But, data feed is free only for stock brokerage firms or members of the exchange to power trading platforms of customers registered on the exchange. Which means that if the data feed is being used for any other purpose, there is a cost to it. This cost is quite high for live data feeds, which makes it prohibitive to run a fantasy stock market game at scale. While the delayed data feed is cheaper, you can’t really run a game if the person playing it knows the price of the stock in advance.

Update as on 8th Aug 2020, we got to know from the exchanges that they are not allowed to provide data to any virtual trading or gaming platforms. Also that they would take action on those who scrape data from exchange website or other broking websites, and use it on the platform.

Social trading

Social or “copy” trading is where someone with a profitable track record, publishes his or her trades live on the platform. These trades are generally accompanied with the rationale for taking the trade, and/or a feature for subscribers to copy all such trades. The influencer gets a revenue share from the platform for the trades generated or gets to collect a fee directly from followers.
Platforms like Etoro, Zulu, etc. have made this concept popular in the CFD (Contract for difference) world. CFDs work in jurisdictions where regulations aren’t tough. They are banned in most countries, including India.

The reason such a platform can’t be built in India is again because of regulations. While you see a lot of people sharing trading ideas on Twitter, even that is grey. But it is still okay because there is no monetary consideration when you share an idea on social media. As soon as the person sharing the idea is collecting fees in some form, the Registered Investment Adviser (RIA) or Research Analyst (RA) requirements kick in. An RIA license is required if you give an idea specifically to a certain individual and an RA license if you give out broad trading ideas to an audience. While it is possible to build a platform where everyone trading is either an RIA or RA, it is very tough to scale it as the regulatory requirements to be an RA or RIA are quite steep. A recent circular from SEBI also bans RIAs or RAs from providing free trials, so even if there were RIAs or RAs, you can’t offer trials to first time users to try out the product. SEBI has also banned automated trading for retail, which means that the platform can’t allow a follower to automatically execute trades every time the influencer trades — which is the main attraction of the copy trading platforms, hence “copy” trading.

While the above article might sound pessimistic, we like the ideas. There is a way to execute these well with proper checks and balances to ensure retail investors’ interest is not compromised. For anyone working on this idea, I guess the starting point is to have an MVP (Minimum viable product) and apply to the SEBI regulatory sandbox and get the regulatory nod for this by proving that this will help investors and the ecosystem. If you get the necessary go-ahead, please do write to us on [email protected] 🙂 We will not only be able to fund but more importantly, help you get access to an audience who can validate the idea and product quickly.

Cheers,

Nithin Kamath

CEO @ Zerodha and partnering startups through Rainmatter to help grow and improve the capital market ecosystem in India. Love playing poker, basketball, and guitar. @Nithin0dha on Twitter.

28 comments

  1. Taparia says:

    Wonderfully written article. loved your views regarding the future of copycat Trading. I am sure now that you are mentioned even the regulators would be looking to change the rules. cheers.

  2. Sagar M Barot says:

    Dude …good article..

    Check your Twitter …I waited for like 17 minutes on the phone to 0DHA holding to have someone answer my call .. improve your support first.
    I know 1200 people are working from home and we have Covid situation but still ….this was not expected from 0DHA…. improve your support

  3. Rajesh says:

    Hey, Bro ) if You Can Recall I Was already on This.
    Can I get opportunity Here?

    • Hey Rajesh, you didn’t read the article properly? 🙂 I am giving reasons on why the idea is not feasible.

      • Rajesh patel says:

        Ahh, you were like starting point is to have MVP & apply Sebi regulatory sandbox and get the regulatory nod for copy Trading by proving that this will help investors and the ecosystem. If I get the necessary I can go-ahead,& come to you)
        Right?

        Well, I’ll Try To Brief Via Mail. How I See Copy Trading & Why Regulatory May Approve.

  4. Ak says:

    Hello

    Free stock tips is like the bullet of a fake riffle which will kill you only which i had experienced in the beginning of my career. Can we stop media organisation from giving that foreign news agencies don’t give that (correct me if i am wrong nitin) like Bloombergquient, CNN etc. But its a trend started by some media houses of india (mainly you know about whom i am talking… clue-ze.b…)can we stop that . If yes how we can do that. These media organisation stop others who give stock tips in Telegram but they can’t able to see the hole in their operation. If fee based trade is there and he/ she is a registered RA/RIA then also SEBI restricted that to publish it in telegram channel.

    What the solution, What the path forward can you guide me to create an environment where only news and research is there not anything else. I had Complained regarding that but i got no response. so batter we can do something if you use some expertise your also.

    Thanks
    Ak

  5. SHREYANSH says:

    Hello sir. What is the future of indian penny stocks for day trading. When can we see major volatility in penny stocks like in US market. Just your views.

    Thanks.

  6. Ak says:

    Hey

    I missed one point, when i opened my account in zerodha i got 2-3 calls everyday and i scold zerodha several times. Then i opened an another account in Kotak and i got calls even more. Finally i opened one account more with one of my family member’s name in motilal and gave another no. After that that no. starts ringing. I thought every broking house like that. It’s a disaster come nightmare for newbies . I didn’t take any subscription but once i got distracted with one of the girls emotional appeal and tried a trade and lost. On the other hand if i switch off i can’t able access my account(because OTP .. banks and all other stuffs) so finally i made some arrangement to rescue that problem. So how we got lost is very problematic. But after changing everything i am in a good shape, do my studies and started investing properly. Can you tell me how those agencies got my no and email. I only gave my no to moneycotrol and some broking agencies.

    If possible delete my comments, as i can’t reach you directly i have to sent you like that in twitter it’s possible but massage from unknown in twitter you know..If possible send me an mail from your personal ID i don’t share with any one as i faced that type of problem. So that i can know the Dark knights batter..

    Thanks
    Ak

    Thanks
    Ak

    • When you open an account, your mobile/email details get updated on a bunch of places – KRA, Depositories, Exchanges, and CKYC. We are 100% sure that it leaks from one of these places and have been taking it up with the regulator to find a solution.

  7. dinesh says:

    sir what about BINARY TRADE apps?..are they legal?..if they r illegal how it’s tat the apps so openly promoted on social media platforms?..

  8. Moinu says:

    You can consider a stimulator integrate to your varsity for trading practice with historical data like Chartmanthra(concept is good but the web platform not supporting well) for your cautomers. This will increase your clients and newbies also encouraged and educated. Thanks

  9. Sathya says:

    Hi Nithin,

    I’m planning to build a virtual trading platform for F&O segment. Specifically for intraday trading/expiry trading with SL-M, MIS order types. I understand from your article that the data feed cost will be high. Do you see any other regulatory issues here?

    Thanks

  10. Suresh babu k says:

    Technical support required from your firm, no client interactions. Absolutely absent

  11. Mahesh says:

    Hello Bro,

    The above ideas are wonderful to support 0dha and the copycat trading too.I love trading but this is not the way i trade………..!

  12. Satya Vyas says:

    New to this, i have observed that there is a massive validation kicker for people to show live trades. This behaviour is very similar to what high quality gamers used to have long time back. Also a ton of videos & content (mostly to sell their seminars though) out there by these people. Makes me think how about – twitch for stock trading ? Obviously quite raw. But would love to hear your thoughts.

  13. Harendra Singh says:

    True !

  14. Gaurav says:

    Well thought, well articulated!

  15. chandrani says:

    Nice Article. Thanks a ton. I have a request to you. So many new investors are coming up now a days. And most of them are lacking knowledge of “Trading and Investment. It will be really helpful for them, if you introduce a virtual platform for Intra-day trading like “Option trading “in sensibull. I hope you ll pay attention to my request.

  16. Pavan Jadhav says:

    Hi Nithin Sir,

    This is perfect what I was seeking as I have good number of audience READY for Copy Trading with the help of System built in and even Tested on Few Beta Testers as well.

    Can you help me if somehow I managed to get this Platform Up — What SEBI will do in that case? And anyway I can approach them or get help from your side?

    Let me know.

  17. Ayush says:

    @nithin sir: i am a very successful trader & i want to create a blog/youtube/app to show my real trades.
    like what i am buying or selling and what sl and target i placed. (and i want to charge some money to show my trades)
    is there any regulatory requirements or i can freely share my trades with anyone?

  18. Shailendra Singh says:

    Hey Nitin,
    Why doesn’t Zerodha hire fresh graduates from Tier 3 colleges?

  19. Vijay says:

    Nitin, can u tell us names of those startups which are in early stages of copy trade applications?

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