In a supreme irony, it is a stockbroking firm and not the market regulator that has stepped forward to warn investors of how they could be scammed by unscrupulous players. Zerodha, which is now India’s largest brokerage firm, has sent out messages warning its investor clients of two types of scams—unauthorised trading in illiquid options and ‘pump-and-dump’ schemes of penny stocks by market manipulators.
That a stockbroker has felt the need to issue such a warning shows how deep-rooted and widespread the problem is. But the Securities and Exchange Board of India (SEBI) has been dragging its feet over action and ignores whistleblowers desperately trying to flag the issue.
Indeed, we at Moneylife have been writing about this brazen price manipulation for over 10 years. We have highlighted the rigging of at least one scrip in every issue of the magazine for six years.
However, there has been no end to such practices.
It is surprising that a stockbroker is highlighting two modus operandi of scammers and creating awareness, setting up a back–end algorithm and additional features in its front-end trading software to alert investors about the stock market scams when it is the market regulator’s (SEBI’s) job.
1. Pump-and-dump schemes: This is extremely common and, in fact, over the years, SEBI has been ineffective in controlling it, despite spending hundreds of crores in Integrated Market Surveillance System (IMSS). In fact, in repsonse to an RTI (Right to Information) query filed by us in 2013, SEBI even replied that it does not have surveillance data!
The manipulation takes place in the form of stock tips that promise quick returns and is circulated through SMS and other forms of messaging asking you invest in penny stocks. “Many scammers send SMS using shortcodes that make it seem like it is from a reputed brokerage firm.Variations of the name Zerodha have been illegally used by scammers recently,” pointed out Zerodha.
Zerodha suggests that “if you receive an SMS asking you to invest in a penny stock, make sure to report it to TRAI (Telecom Regulatory Authority of India) and help save others from falling to the fraud.” This advice is seemingly useless because TRAI is even worse than SEBI. It takes no responsibility whatsoever about spam messages and never acts on any complaints.
Zerodha has introduced a special feature in the form of a penny stock nudge on their buy order window (currently on the web and soon to be introduced on the mobile). The idea is to alert customers if they are unaware that they are investing in a penny stock. They also have an additional warning for stocks which they think are being manipulated through SMS tips and social media buzz. Zerodha says that the customer would be free to proceed, but, hopefully, the customer won’t proceed and even if the customer does proceed, the customer will reduce the trading size to as little as possible to reduce his/ her risk.
While Zerodha has talked about pump-and-dump schemes, interested parties have used market manipulation to convert black money to white as unearthed by the extensive investigations by the income-tax department. However, SEBI has refused to act on such bogus trades, despite extensive documentation. Please see our exclusive Cover Story on this.
2. Illiquid options: In the second type of scam, Zerodha has given an example how scammers place illegitimate, non-genuine trades, which might later on land investors into trouble. “Over 30,000 options contracts are listed on the exchange, but only a fraction of them actively trade, while the rest are illiquid. These options contracts where there is no other trading are used by scammers to place illegitimate trades (buy high and sell low with the same account and in quick succession) which creates a loss in your account and profit in the other trading account. You would assume this is a genuine market loss, but it clearly isn’t."
Zerodha has advised that sharing your log in credentials with advisors or people claiming to be market experts, who offer to trade on your behalf, exposes you to the colossal risk of a fraudster who can create a loss in your account using non-genuine trades and move your money to another trading account, making it very difficult for you to even figure that you have been scammed.
"Apart from the loss, you are now also exposed to regulatory action. Any such trading activity in your account would be looked upon by the income tax department as money laundering (creating losses to avoid taxes, or convert white to black money or vice versa). SEBI considers such trades circular trading. Apart from the monetary penalty that such trades entail, you could potentially be banned for life from the markets by SEBI."
Zerodha has also counselled that "If you had given access to someone who has created such an artificial loss, you can lodge a police complaint against the fraudster, let our compliance team know about it, and we will help you with the case."
What are non-genuine trades ?
Giving a brief idea about what exchanges consider abnormal or non-genuine trades, a BSE (Bombay Stock Exchange) guideline circular of February 2019, said, “Trading activity of clients concentrated in a specific security or contract, which is not traded frequently or trading with low volumes with client squaring up their position within a short span of time. Additionally, factors such as client’s earning significant profits or incurring losses on account of such transactions, and their consistent contribution to the daily average volumes of security, contract may also be looked at.”