Regulating the Stock Game: SEBI’s Norms for Fantasy Trading Platforms

[Garv Arora is 4th year B.A., LL.B. (Hons.) student at HNLU, Raipur]

The Indian stock markets have witnessed an increase in the third-party platforms that provide virtual trading services based on real-time price data. The Securities and Exchange Board of India (‘SEBI’) has recently unveiled new norms for the dissemination of real-time securities price data to third parties, including various online platforms, and it aims to curb the misuse of the data of shares of the listed companies with third parties. SEBI in its circular issued on 24 May 2024 (‘Circular’) has observed that various online platforms are providing virtual trading services or fantasy games based on the movement of the real-time price data of the listed companies.

SEBI seeks to curb the sharing of such data except where such information is required for the orderly functioning of the Indian securities market or to fulfil any regulatory requirement. This post firstly analyses the working of such platforms and how they raise concerns for the potential misuse of real-time market data of listed companies. Secondly, it sheds light on the recent Circular in line with the earlier press note and consultation paper. Thirdly, it delves into the international standards dealing with such stock-picking games. Lastly, it identifies lacunae in the current Indian legal framework and suggests a potential solution for it.

Working of Fantasy Stock Games and Misuse of Real-Time Price Data

Fantasy stock gaming apps allow users to create virtual portfolios and make trades based on real-time stock market data. An app obtains real-time stock data from stock exchanges or other financial data providers. It allows users to invest in fantasy stocks wherein the users can rely on stock market information and skills to make a bid on a stock. Typically, these games or competitions do not entail trading shares or confer any rights to buy or sell actual shares. Instead, the performance of the portfolio mirrors the price fluctuations of shares traded on the stock exchange. For instance, the Indian Trading League enables participants to engage in simulated share trading at a fixed transaction fee of Rs. 20 and offers prizes exceeding Rs. 1 crore. Such services are designed to facilitate competition for rewards based on the performance of a virtual stock portfolio. These games appear lucrative to various individuals as they offer the option to deal in the stock markets without suffering from any serious risk typical of the stock markets. The entry fees of these platforms are much less than the cost involved in trading in actual stock markets.

These virtual trading apps take real-time data from stock exchanges and ensure that their platform renders a real-world experience to its users. However, according to SEBI, there can be a misuse of this data that may work contrary to the interest of the investors. Hence, through its press release and consultation papers, SEBI has always sought to limit the use of such virtual trading platforms that gamify the stock markets.

Dissecting the Circulars: Now and Then

The stock fantasy games have been under the scrutiny of SEBI for a while now. In 2016, via its consultation paper, SEBI tried to curb such market activities by cautioning investors and stating that such schemes or games are neither approved nor endorsed by SEBI. Furthermore, there is no recourse available if any investor suffers a loss in such games. It noted that there is no obligation on them pertaining to transparency and authenticity regarding the process being followed. However, investors are lured by such schemes with the assumption that these platforms possess expertise in predicting securities markets. Hence, SEBI recommended that no person shall organise or offer any scheme or games related to securities markets.

In its recent Circular, SEBI emphasised that market intermediaries and market  infrastructure  institutions  (‘MIIs’), such as  stock exchanges, depositories, and clearing corporations, must ensure that real-time price data is not disclosed to any third party unless it is essential for the proper operation of the securities market or to comply with regulatory requirements. It has allowed MIIs to enter into “appropriate agreements with entities” and that agreement shall provide for “activities for which the real-time price data would be used by the entity including the justification that it is required for the orderly functioning of the securities market.” Furthermore, the list of entities with whole the data is shared will be reviewed by the Board of MIIs at least once in a financial year.

The MIIs are allowed to share the data for investor education and awareness activities with a lag of one day. It is pertinent that the activity must not offer any sort of monetary incentive to the participants. MIIs must take necessary steps to ensure that there is no misuse of any data by the entities. The aim behind this move is to prevent investors from developing any sort of unrealistic expectations about the stock markets. Considering the Indian scenario, it is pertinent to note how these practices are regulated from an international perspective.

International Scenario: Foreign Regulators on Fantasy Stock Trading

The Stock Exchange of Hong Kong itself organizes Investment Games in Traded Options & Stocks to help investors learn the trading mechanism with real-time market data. It encourages investors to apply various investment strategies involving both stock and options. The orders of the investors are matched at the real market price and a simulated portfolio is maintained for it. Additionally, it has introduced the Simulated Investment Market (‘SIMart’), a platform designed to host online investment and trading games. SIMart replicates key aspects of the securities market, offering participants the chance to familiarize themselves with and test trade HKEx products in a risk-free environment, as it does not involve the use of real money.

In the United States, the Stock Exchange took a similar stance, as that of India, to decide upon the legality of virtual portfolio trading using real-time market data. In the case of Stock Battle, the game allowed the users to create virtual portfolios and charged small entry fees. The Securities and Exchange Commission (‘SEC’) sent Stock Battle a cease-and-desist letter stating the firm’s games amounted to dealing in “unregulated security-based swaps”. In another instance, the SEC ordered Forcerank LLC to pay a $50,000 penalty for unlawfully offering complex derivatives products to retail investors through mobile phone games marketed as “fantasy sports for stocks.”

Likewise, the Australian Securities and Investments Commission (‘ASIC’) has also issued a warning to online gaming companies offering fantasy stock trading services. According to ASIC, these companies may be operating in violation of existing financial regulations. ASIC’s primary concern is that fantasy stock trading platforms, which simulate stock market investment through games, might inadvertently or intentionally bypass financial laws designed to protect consumers.

The international scenario pertaining to fantasy stock trading differs in some points and a cue can be taken from them to regulate the Indian framework in a better manner. The stance of the Indian regulator regarding the stock fantasy games is in line with the SEC or ASIC; however, SEBI may itself organize such games or competitions to authenticate the process and help the investors learn the intricacies of stock markets.

SEBI may consider adopting innovative approaches akin to those seen in Hong Kong and organize its investment games and simulations. This would ensure that educational initiatives are aligned with international regulatory standards and that the market data is free from commercial exploitation. However, critics may argue that developing and maintaining sophisticated simulated trading platforms require significant technological investment and expertise for that the current framework needs to be overhauled. In this regard, SEBI has recently launched the ‘Saa₹thi 2.0’ app which aims to create awareness among investors about the complex concepts of the securities market, KYC process, trading and settlement, mutual funds and recent market developments. It is suggested that SEBI may consider incorporating  various such games and tournaments in the Saa₹thi app.

Lacunae in the Proposed Changes

There are various lacunae in the new norms of SEBI dissemination of real-time securities price data to third parties. Firstly, the imposition of stringent restrictions on the sharing of real-time data could inadvertently hinder innovation and educational initiatives in the financial technology sector, as various investor education platforms like “Investopedia Stock Simulator” that use real-time data to teach market dynamics might struggle under these regulations. These platforms utilise real-time stock market data to replicate the experience of operating a genuine online brokerage account and the participants are allocated a virtual cash balance, enabling them to execute simulated trades based on real-time market information. However, the Circular limits the sharing of real-time market data for education and awareness purposes with a lag of one day and may pose certain challenges as the data will already be available in the public domain. For this, SEBI may consider providing a two-tiered data access system in which it will provide lagged real-time data for general educational purposes but offer real-time data for advanced training programs under strict supervision. This approach will help in maintain data security and ensure compliances while allowing advanced learners to benefit from real-time market conditions.

Secondly, it undermines the aspect of “learning by doing” that emphasizes active engagement and practical experience to enhance learning. Stock markets are inherently complex, with numerous factors influencing prices and trading decisions. Fantasy stock games like Bullspree or TradingLeagues provide a simulated environment where investors can practice trading. This allows the investors to understand and navigate the intricacies involved in trading, such as analysing market trends, managing portfolios, and making strategic decisions, all without the real financial risks associated with actual market investments. By doing so, these platforms offer a valuable educational experience, helping investors build their skills and confidence before engaging in real-world trading. However, through its circular, SEBI has restricted the sharing of real-time price data with them which might mark the end of fantasy stock platforms.

Thirdly, SEBI has allowed the sharing of real-time share price data for investors’ education and awareness activities with a lag of one day. However, in various instances, these educational platforms have also been penalised for misusing the market data for disseminating data deceptively to its users on a commercial basis, for virtual trading, gaming, and stimulation. The Circular is silent on such cases and this issue needs the attention of the stock market regulator.

Lastly, SEBI’s approach does not fully align with international standards and practices, such as those in Hong Kong which balance investor protection with market education through simulated trading environments. As engaging in fantasy finance can be helpful for the investors, since it provides insights into what to expect when trading in actual markets, SEBI’s move on these platforms may impede the learning process of the investors. Hence, such issues may be taken into consideration to regulate the dissemination of real-time market data with the third parties.

Closing Thoughts

SEBI’s new norms for the dissemination of real-time securities price data aim to curb misuse by third-party platforms offering virtual trading services and fantasy games. However, these regulations have certain lacunae that could hinder innovation and education in the financial education and awareness programs. The stringent restrictions may adversely affect educational platforms that rely on real-time data to teach market dynamics, as they might struggle to operate effectively under these new rules.

By taking cues from international practices, SEBI can refine its regulatory framework to better support investor education and innovation in the financial sector. Embracing simulated trading environments and reconsidering data-sharing restrictions can provide a more balanced approach, fostering a deeper understanding of market dynamics and enhancing investor competence without compromising market integrity.

Garv Arora

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