Mint Explainer: Sebi’s beef with virtual trading apps

These are your options: You could gamify the stock trading experience using virtual money. On top of that, you could start a contest, charge a small entry fee, and distribute prizes. And maybe also launch a social trading platform where users can show off their stock-picking skills.

That’s exactly what a few startups did and profited from. But this has triggered the ire of the Securities and Exchange Board of India. In a recent circular, Sebi instructed stock exchanges, clearing corporations, and depositories (collectively referred to as market infrastructure institutions), and other registered intermediaries to stop sharing live market data with others unless required for the orderly functioning of the securities market.

“Market price data may be shared for investor education and awareness activities without offering any kind of monetary incentive to the participants with a lag on one day," Sebi said in its circular.

Mint dives into what this means for a section of the startup sector that has gaming apps and websites offering virtual trading services or fantasy trading games using real-time stock price data.

 

Why is Sebi wary of these platforms?

Fantasy trading games run paid contests using live data feeds of stock prices, while social trading platforms allow users to reveal their actual stock-pickings and share-market performance, which others could take cues from.

These platforms, however, are not traded on any Sebi-recognized stock exchange, which means the market regulator would not be responsible for settling user grievances in this structure.

Besides, “such internet-based games have the potential to sideline the regulated market and offer some alternatives to investors and market analysts", said Sumit Agrawal, partner at Regstreet Law Advisors and a former Sebi officer.

“While the investors and operators of these sites may have analysed general laws to claim that they are not assisting betting or wagering contracts, it needs to be appreciated that securities laws are special laws, which override the applicability of general laws."

The Securities Contacts (regulation) Act, 1956, defines a derivative as “a contract which derives its value from the prices, or index of prices, of the underlying securities". As per the Act, such derivatives can only be traded in recognized stock exchanges.

Sebi has in the past warned investors to be careful about such platforms. In 2016, it cautioned investors that sharing confidential and personal trading data on such platforms would be at their own risk, cost, and consequences. That was a year after the US market regulator shut down a fantasy trading platform.

What happened in the US?

In 2015, a US-based fantasy trading platform called Stock Battle received a cease-and-desist order from the US Securities Exchange Commission. In simple language, the regular asked the platform to shut shop.

Stock Battle allowed users to build a virtual model stock portfolio, and winners would get a prize from the pool of money collected as entry fees. For the SEC, this amounted to dealing in “unregulated security-based swaps", according to a Yahoo Finance article quoting the company. Stock Battle was eventually shut.

That same year, the SEC Office of Investor Education issued a public alert to warn about fantasy stock trading platforms. It said the operators of such websites and users “should be aware that some of these transactions could fall under a type of security known as a ‘security-based swap’".

Is this the end for stock gaming and fantasy trading apps?

In the short term, all parties will be affected. For the long run, the idea is to separate the good apples from the bad. Those that survive will operate under a well-refined regulatory boundary.

“While the circular's intent is to prevent misuse and unauthorised use of market data, it could disrupt the business models of stock gaming websites and apps, potentially leading to a decline in their operations unless they can adapt to using lagged data or find alternative ways to comply with the new circular," said Agrawal of Regstreet Law Advisors.

Are there any other similar issues?

Sebi’s latest circular doesn’t address the issue of betting on other securities.

Some digital platforms allow betting on the price fluctuations in global markets, Bitcoin, and even on daily stock movements–such as, will the “opening price of Microsoft be $428.00 or more on May 30?". Users can also bet on things like whether Youtuber Sourav Joshi’s latest video would touch 3.02 million views by 12 am.

While some of this might be outside the purview of Sebi, punting on stock markets remains rampant.