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SEBI'S CRACKDOWN ON FANTASY STOCK TRADING APPS: IMPLICATIONS AND FUTURE PROSPECTS

[Ashutosh Shukla. The author is a third-year B.A., LL.B. (Hons.) student at the Hidayatullah National Law University Raipur]


Introduction


In recent years, the rise of fantasy stock trading apps has revolutionized how novice investors engage with the market. However, the Securities and Exchange Board of India (SEBI) is now intensifying its crackdown on these platforms that use virtual real-time share prices to offer fantasy games. These platforms have proliferated in recent years, fuelled by growing retail investor interest in stock trading. Unlike traditional stock trading through brokers, these apps allow users to compete using fictional trading strategies and portfolios, with winners earning real money. Participants pay a membership fee, but no real stock transactions occur. SEBI has now directed exchanges and depositories to stop sharing real-time price data with such third parties to curb these activities.


The rise of these virtual trading apps stems from their appeal to novice investors seeking to hone their trading skills without financial risk. However, SEBI has long viewed them with suspicion. Back in 2016, SEBI proposed banning such platforms outright in its Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations 2013. This proposal was eventually shelved, and instead, SEBI issued a cautionary press release warning investors about the risks associated with stock market games.


Despite SEBI’s warnings, the popularity of these apps persisted, prompting the National Stock Exchange (NSE) to issue its own circular in 2023, reiterating concerns about use of NSE data for the purpose of gaming and virtual trading. SEBI’s recent circular Norms for sharing of real time price data to third parties dated 24 May 2024, marks a significant escalation in regulatory efforts, aiming to dismantle the data lifeline these apps rely on.


By restricting access to real-time price data, SEBI hopes to stymie the growth of these virtual trading platforms and protect investors from potential financial harm. This move underscores the regulator’s commitment to maintaining the integrity of India’s financial markets amid evolving digital trading practices.


In this article, the author will firstly delve into SEBI’s regulation, which tightens the dissemination of real-time market data, particularly targeting fantasy trading apps. Subsequently, it will analyze the problems associated with these apps, including regulatory evasion, user misconceptions, and the creation of parallel markets. Finally, the article will discuss the broader implications of SEBI’s actions, including their impact on investor protection, market stability, and the future of virtual stock gaming in India.


Understanding SEBI’s New Regulations


In May 2024, SEBI issued a circular leveraging its authority under Section 11(1) of the Securities and Exchange Board of India Act 1992 to regulate the sharing of real-time market data with third parties. This followed recommendations from SEBI’s Secondary Market Advisory Committee (SMAC) to curb data misuse. In response to the recommendations put forth by SMAC and to curb potential misuse or unauthorized access to such data, SEBI has instituted the following regulations:


•          Sharing of real-time price data is limited to regulatory necessities.


•          Market Infrastructure Institutions (MIIs) and market intermediaries must enter into formal agreements for the exchange of real-time data.


•          Vigilance measures must be taken to prevent the exploitation of stock market data for educational purposes.


•          Market price data may be disseminated for investor education and awareness, without any financial incentives for participants with a one-day delay.


An important aspect of SEBI’s action is that it will not impact media agencies providing real-time data feeds. Media organizations play a pivotal role in disseminating information to the public, contributing to market transparency and informed decision-making among investors.

The regulations will significantly impact platforms like StockPe, TradingLeagues, and Bullspree, which offer simulated trading and real-money competitions. The use of real-time data in such environments can lead to speculative behavior and potential misuse, which SEBI aims to curtail with its new guidelines.


SEBI’s regulations aim to curb speculative use of real-time data, promoting market integrity and investor confidence. These measures underscore SEBI’s commitment to financial stability and investor protection.


Scrutinizing the Drawbacks of Virtual Trading Apps


While virtual trading apps offer risk-free trading practice but raise regulatory and ethical concerns. SEBI is uneasy about platforms involving real money, which leverage market data and charge users. Without regulation, these platforms are not obligated to provide formal disclaimers about the risks of real-money trading. As a result, users may develop a misleading sense of trading proficiency based on their virtual successes, potentially leading to detrimental financial decisions when engaging in actual stock trading.


As per SEBI’s Consultation Paper, one of the main issues is the lack of transparency and regulatory oversight on these platforms. Entities offering such schemes often operate with vested interests and without the necessary regulatory obligations, leading to a potential misuse of user trust. The absence of process transparency can mislead the general public into believing that these platforms have legitimate expertise in market predictions. This false sense of security can lure individuals into making uninformed financial decisions, assuming their virtual trading success will translate into real market profitability.


Despite exchange warnings, some platforms continue using market data unauthorized, functioning as unregulated securities markets. These apps mimic real market trading without oversight, posing risks to investors and challenging the regulatory framework.


Lastly, the legal framework, particularly the Securities Contracts (Regulation) Act 1956 (SCRA), governs trading in securities and derivatives. According to the Section 18A of the SCRA, derivatives can only be ‘traded on recognized stock exchanges’. Virtual trading games that derive their market feeds from live exchanges fall outside this legal structure, potentially classifying them as illegal derivatives. This legal ambiguity highlights the necessity for clearer regulations and stricter enforcement to ensure that virtual trading platforms do not mislead users or compromise the integrity of financial markets.


Implications and Analysis of SEBI’s Regulation


SEBI’s decision to regulate virtual trading apps primarily aims to safeguard retail investors and uphold the integrity of the financial market. By limiting unauthorized data use, SEBI seeks to prevent investors from falling into traps for higher returns and suffering significant financial losses.


Platforms like StockPe, TradingLeagues, and Bullspree, which allow users to practice trading in simulated markets, will be significantly impacted by SEBI’s circular. These platforms often target young adults, introducing them to trading with real money competitions that promise monetary rewards. The platforms earn commissions from user participation, making them lucrative yet potentially misleading for inexperienced investors.


SEBI’s circular represents a commitment to prioritizing investor protection and promoting responsible financial education. By encouraging the development of well-designed educational tools and fostering collaboration, SEBI aims to ensure that aspiring investors access valuable learning resources while safeguarding the financial system’s integrity.


The new regulations could severely affect unscrupulous stock-market training workshops and institutes that attract clients by promising live market practice sessions. With the requirement for delayed data, these workshops might see a decline in participation. Manendra Singh of Economic Laws Practice notes the ambiguity around the circular’s provisions, suggesting that it could lead to brokers incorporating restraining clauses in their client agreements to prevent the misuse of live market data during training sessions.


SEBI’s new norms are a significant development in enhancing the regulatory framework for sharing real-time price data. By imposing stringent conditions and requiring formal agreements, SEBI aims to curb data misuse and promote transparency and accountability. These measures are likely to protect investors and uphold market integrity, balancing the need for investor education with appropriate safeguards.


The circular also aims to address concerns related to “dabba trading,” a banned practice where orders are placed through unauthorized channels. By limiting access to real-time data for gaming apps, SEBI aims to prevent users from developing unrealistic expectations about the stock market or engaging in risky behavior based on virtual trading success.


Conclusion and Way Forward


While SEBI’s new regulations may spell the end for paid fantasy stock gaming platforms, they also raise concerns about the future of educational trading tools. To adapt, developers might need to innovate new educational models that comply with these regulations. With access to data now delayed by one day, the educational value of these platforms diminishes, raising concerns about whether SEBI’s move could be counterproductive for investor education. Real-time data is crucial for effective learning, and only time will tell the full impact of these regulations on both investor education and market engagement.


Internet-based virtual trading games have the potential to sideline the regulated market, offering alternative platforms for investors and market analysts. While regulated trading serves an economic purpose in capital and commodities markets, widespread use of these games could create a parallel, unregulated securities market.


The outlook for virtual stock games in India remains uncertain. Developers must adjust their apps to adhere to SEBI’s regulations, potentially by transitioning to non-real-time data or prioritizing educational features over competitive elements. Players who previously enjoyed these games for entertainment or monetary gains will have to seek alternative options. SEBI’s enforcement efforts underscore the changing regulatory environment surrounding financial apps and gamification. Despite their popularity as learning tools, SEBI’s focus on investor protection may prompt developers to develop more educational and ethical financial gaming experiences.

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