In today’s Finshots, we tell you why market regulator SEBI (Securities and Exchange Board of India) has a problem with fantasy stock trading platforms.

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The Story

Investing in the stock market is risky business.

You could buy a stock with the hope that its price will go up in a few days. But that bet could go haywire if the stock sways downward. You could panic and exit your investment, only to find out that despite suffering a loss you still had to shell out a significant amount in broker fees, stock exchange fees, taxes and other charges.

But what if you could trade in the stock market without the risk of losing so much money?

It’ll give you the same experience as a stock trading platform, feature the same stocks that are listed on popular exchanges like NSE (National Stock Exchange) and BSE (formerly Bombay Stock Exchange) and even have similar price movements and volatility. Just that if your trade becomes a dud, you don’t lose the whole amount that the stock was worth. You just lose a small entry fee. Oh, and if your stock constantly does well, you could stand a chance to win stuff like gold coins, a Mercedes, Apple products or even huge cash prizes.

That’s what fantasy stock gaming apps and platforms do. They just charge a tiny entry fee, smaller than what your broker would charge you to trade in the real stock market. And all you have to do is predict if the price of a stock will go up or down in the next 60 seconds. Or even trade virtually with fake money to earn points which you could redeem for these fancy rewards later on. So the only loss you make if things don’t go your way is that small entry fee.

And just like fantasy sports, this trend is picking up too.

But there’s a problem.

These virtual trading apps use real time data from regulated stock exchanges like the NSE and BSE. Simply put, they buy data like stock prices, buy and sell quotes, etc. from authorised vendors to make sure that their platform feels like the real thing.

And SEBI doesn’t seem to like the sound of that. It believes that using data from a stock exchange’s feed to gamify the markets is as good as misusing it and can even hurt investor interest.

That’s exactly why it threw a spanner in the works. A few days ago, it rolled out a circular barring third parties like stock gaming platforms from getting their hands on such data.

But here’s the thing. This isn’t a sudden decision that SEBI came up with out of the blue. It has had an eye on these platforms for a long time now.

In fact, in 2016 it even wanted to ban such platforms for good. Thanks to celebrity endorsed fantasy stock games like Samco Securities’ India Trading League, that former Indian cricketer Kapil Dev promoted or even Raj Kundra backed Stock Race. If that name doesn’t ring a bell, you'd know him better as the former co-owner of IPL’s (Indian Premier League) Rajasthan Royals cricket team and Bollywood celebrity Shilpa Shetty’s husband. But that proposal sort of fell apart. And SEBI decided to just forewarn investors that it didn’t approve of such stock market games.

But hey, how are websites like Moneybhai (by Moneycontrol) or even the BSE itself offering virtual trading games, you ask?

Look, SEBI doesn’t have a problem with platforms using market data for virtual trading per se. The issue is simply the involvement of real money.

Platforms charging their users to play a virtual trading game are literally piggybacking on cheap or low cost market data to build their own business model. And that can be detrimental to users simply because while these games earn money from increased user interest, SEBI doesn’t regulate them. So they don’t have an obligation to give users formal disclaimers about how risky real money based virtual trading can be.

Besides, users who constantly win these games might also misconstrue their victories for skill to trade in the real stock market. And unfortunately, SEBI can’t give them any sort of recourse or compensation if their winning streak doesn’t continue when they deal with actual stocks.

That’s precisely why SEBI wants to restrict these folks from fetching real time data from the stock markets.

It’s a lot like what the US Securities and Exchange Commission did to a virtual stock trading website called Stock Battle in 2015. This game allowed participants to build virtual portfolios for a small entry fee. If they won, they’d get prizes depending on the pool created out of all other participants' entry fees.

No sooner had the SEC learnt of it than it ordered the platform to discontinue the way it operated. It would only allow the virtual trading game to continue if it agreed to run as a registered entity. But Stock Battle realised that they didn’t have the funds to do that. Even if they managed to get funded, it wouldn’t be a scalable business model simply because fetching data from US Stock Exchanges can be an expensive affair, unlike India where stockbrokers get it for free and other third parties can pay authorised data vendors a reasonable monthly subscription to fetch data. This meant that Stock Battle had to eventually shut shop.

Sadly, SEBI’s new rules may not just mark the end of paid virtual fantasy stock gaming platforms, but even spell doom for educational fantasy stock gaming platforms that operate for free. Because while they can still access data, they’ll only be able to get it one day later. And what use is delayed data when you already know what happened to the market yesterday right?

Does that make SEBI’s move counterproductive for investor education? Only time will tell. Until then…

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