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Fantasy Gaming for Trading & Investing | Raghu Kumar
Raghu Kumar is one of the unique founders I have featured on my podcast.
He and his brother Ravi grew up in the US and converted a ten thousand dollar investment into 2 million dollars through algorithmic trading in just two years!
Then they took the contrarian decision to move to India to trade in the Indian equity markets, and this led to the birth of RKSV which today is better known as Upstox.
One of Asia's fastest-growing stock brokerages, Upstox became a unicorn in 2021 and is one of the leading trading platforms in India, having raised more than 200 mn dollars to date.
In the first part of the conversation, Raghu speaks of making phenomenal wealth through trading and building Upstox in a highly competitive market.
Other Ways to Listen:
Some of the things he shared:-
1. Running the News Trading Strategy
2. Making money in Forex trading
3. Employing direct market access
4. Components of a brokerage firm
5. Competitive differentiation
In 2020, Raghu stepped down from the operational team of Upstox (but remains the largest shareholder of Upstox) to start his next venture, Rain Platforms.
Only 4% of Indians have a Demat account. Compared to that, 40% of Americans have a Demat account. This is the massive opportunity that Raghu is now chasing.
Described as the “Netflix of the stock trading world”, Rain Platforms aims to make the intimidating world of trading more comfortable.
Rain is trying to grow investor participation rates by reimagining how users interact with the financial markets. Rain is the company behind TradingLeagues, India's first fantasy gaming app for trading and investing.
In the second part of the conversation, Raghu spoke about some of the innovative platforms that Rain is building to help more Indians become active investors, including a platform for copy investing and a real money gaming platform for mock trading.
Other Ways to Listen:
Some of the things he shared:-
1. Hedge funds
2. First product offering, Trading Rooms
3. The concept of Guaranteed price pool
4. Capital raising strategy
Read the text version of the episode below:-
Raghu: I'm Raghu, I founded Upstox and after Upstox I founded Rain Platforms. Upstox is an Indian company, and all its customers are in India. One of the requirements for the company essentially was, you have to be in India. It's just the nature of the business. It would be almost wrong to be involved with the company with more than 10 million users, spending most of your time out of the country.
At a certain kind of moral level, ethical level, I felt like it would not be correct for me to be involved with an Indian company full-time. So that was the primary reason.
Akshay: And when did you move back? You had come to India full-time lock, stock and barrels.
Raghu: I moved back because my kids were going to school in the US. I was doing this thing where I was spending half the time in India, half the time in the US and at a certain point it just became ridiculous like this, it was not sustainable. That was really the primary reason. There was a secondary reason as well.
Essentially, we had 4 co-founders and I've always been the kind of person where I need to feel the things that I'm doing every day, really move the needle for a company. And if there is 4 co-founders, for me personally, that's not something that I wanted to do. I basically said, "Hey guys, I'm going to probably just step down from the operational team".
And I moved back a couple years ago. Two years ago, moved back and I set up my next company, Rain Platforms.
Akshay: When did the 4th co-founder come in? You started with three of you, the two RKs and the one SV?
Raghu: We had a 4th co-founder join, 2017. Obviously, everyone is bringing incredible amounts of value and experience to the table.
It's not anything negative, it's just that me personally, being from the US my kid is going to school in the US. My second child had just been born. I was like, "okay, I probably need to make some changes and this is probably a good time for me to do that". So I moved back and I had this kind of vague idea of starting another company.
The first thing I did was I incorporated a company and I called it Rain because I just love the idea of making it rain. So that was the reason for the naming of the company. Rain basically has pivoted a couple times, but initially the idea was for us to launch a retail hedge fund.
Akshay: how is a hedge fund different from other ways in which somebody can invest money?
Raghu: A hedge fund basically is when you have some sort of a management company making decisions to drive an ROI on behalf of others' capital. You put money into the fund, and then you have a fund manager, and then the fund manager makes decisions and they drive returns. Usually there is a management fee and a performance fee.
Hedge funds exist all around the world. The thing with hedge funds though, is that it's usually limited to the ultra-rich. When we think about hedge funds, we don't think about the everyday mom and pop having access to hedge funds. Now in India, you have different types of investment vehicles. You have what are called PMSs.
You have the next step above that is AIF, for which your net worth has to be in the crores. But even with the PMF, the minimum deposit is 50 lakhs. And a PMF is also allowed to do certain things and not allowed to do other things. PMF, for example, cannot trade derivatives, and a lot of rules exist.
The way we operated Rain, and back then it was called Rain Fund because the idea was to mimic a hedge fund, but it actually wasn't to fund at all. What happened was our clients were depositing anywhere between 10 to 25 lakhs. We were trying to basically lower the entry point, but the clients were actually managing their own accounts.
Let's say you had an account with Upstox. You would fund it and then you would activate your broker's API and you would securely transfer the credentials to your API to us. And what we would do is we would build fully automated algorithmic trading strategies and run that as a software on each of our clients' accounts.
So that was the whole idea behind Rain Fund. The idea was actually to democratize the whole concept of a hedge fund and really make it more accessible. We ran that for more than a year. We generated very good returns for our clients.
Akshay: Question here- it was a one size fits all algorithm, or was it customized to each investor?
Raghu: There was no customization, we literally ran a standalone application on each client's account. This was due to multiple reasons. The biggest reason was just that we didn't want the client to actually have that kind of control, because if you do that, it basically opens up like a Pandora's box, and then the question really becomes, 'who is responsible for the decision making'.
Number two was just to make it very compliant and almost like cookie cutter-ish in a certain way. It's an application. It's running fully automated trading algorithms. Either you take it or you don't. Much more scalable, and it did its job very well. And the cool thing about what we did was our software was basically broker agnostic.
As long as the broker had a broker API and the user was able to securely share just their API credentials with us, then we were good to go. Long story short, we did very well. We generated more than a 35% CAGR for our clients.
Akshay: What were your assets under management?
Raghu: That's the issue. I think at the peak we had almost 500 clients. Average ticket size was not much- 25 lakhs. So the AUM was never high and it was never going to get high because we were never going to take on a lot of capital from anyone because that's just the model that we had. Because what happens when you do that, is liquidity concerns.
Our strategies- were trying to take advantage of opportunities which did not exist for very long. So if you had one guy coming in with crores of rupees, It's basically unfair to everybody else. Because it is one guy taking up so much liquidity. But because of all those constraints, the business was basically not sustainable, number one.
Number two, it really made me think about whether this is what I wanted to do. So I had to go back to that question because at a certain level we were democratizing things, but on another level, we were not because the minimum ticket size was still 10 lakhs. So it's not like super retail.
Then we pivoted to creating a marketplace for fully automated algorithmic trading strategies, and these strategies were built by us and also other Quants.
Akshay: A company which builds algorithms and does quantitative trading, or quantitative strategies for trading is called a Quants.
Raghu: A Quant is traditionally actually an individual. It's just a person. When you hear the word Quant, it's usually just one person who is building quantitative investing or trading models. If it's a firm, it'll be a Quant firm. What we did was, we built a really cool marketplace.
We called it Airbnb for trading strategies. People would list strategies, and then you could come in and you could subscribe to them, and once you subscribe to that strategy, it automatically gets deployed on your map brokerage. We ran that for six months, did very well, and that basically morphed into our first product offering, which is called TradingRooms.
TradingRooms- it's essentially the same thing that I just described, except it's not just for algorithmic trading, it's also a discretionary trading. The pain point that we're solving with TradingRooms is that, if you want to trade on your own, it's very difficult.
Generally, people don't have the time or the resources to really figure out how to trade the markets efficiently and profitably. But there exist a lot of traders out there who do this full-time. These guys are both discretionary traders and algorithmic traders.
Akshay: Discretionary trader is somebody who would do research and it could be based on news events or could be based on fundamental research or technical analysis and like a stock picker would be what that refers to.
Raghu: Discretionary traders is anyone who is not trading algorithmically, like most people out there are just buying and selling in a discretionary manner.
They're just making decisions based on what they think is the right decision to make. So when the human brain is making that decision, it's discretionary. On TradingRooms the concept is: any trader can come in, they can create a room, and once they create a room, then they can start trading on that room.
Their trades are done in a simulated manner. There is no live execution happening, but the track record is being maintained on their room, and then other people can come in, they can discover these rooms and they can subscribe to them. The use case is, let's say you are a retail trader right now trading on your own, and you want to basically show off your skills and you want to monetize that service.
Then you can come in, you can create a room on TradingRooms, and whenever you trade, your track record gets updated. I can discover you, I can subscribe to you, you can charge for your room, and then whenever you take a trade, that trade gets taken on my account. So this phenomenon is called copy trading.
It's a pretty well-known concept. There is a pretty well-known platform called eToro, which is doing this very successfully in Europe and in the US. So basically TradingRooms is like the eToro for India. We launched TradingRooms a few months ago in beta. It's doing very well. We're launching a mobile version for TradingRooms in March of 2023.
We think once we launch the mobile app, traction will pick up significantly. So that's a little bit about TradingRooms.
Akshay: What's a customer journey for TradingRooms? First, they would sign up with any of the brokers who have an API available, put in money over there. Talk to me through that journey for a customer.
Raghu: The typical TradingRooms customer journey right now unfortunately it's a very niche, a user persona, because one of the current basic requirements is that you are aware of what automated trading is. Generally, people are not super comfortable. A- opening up a brokerage account, B- activating the broker's API, and then C- going to trading rooms, subscribing to that room, and then linking their brokerage account.
There's a lot of hoops to go through. So people who are aware of what automated trading is, they find value in TradingRooms. Also, a lot of the traders who are operating rooms on TradingRooms, they end up talking about their rooms to their existing networks. So a lot of traders in India going back to Twitter, they build up brands on Twitter.
Akshay: They become influencers.
Raghu: Exactly, influencers. They're not getting paid by other agencies, but they're influencers in the sense that they're traders who know what they're doing. They're full-time traders.
This is what they do for a living, and so they're trying to build up a brand. A lot of these traders, they find value in TradingRooms. They set up a room, and then they'll go to their social media and talk about it. So that's the one customer journey. We also have a very active Telegram group right now where people ask questions and they invite their friends and things like that, but it's still very much in beta right now, and we're purposely keeping it that way because again, with algo trading, a lot of things can go wrong.
That's one of the issues with algo trading. It's not just about the algo itself, it's also about the brokers execution capabilities, their RMS, their API. Even if only three or four brokers in India have super sturdy APIs, a lot of people don't have accounts with those brokers. They may be having an account with another broker and that broker might have just launched their retail API maybe a couple months ago. So issues come up and what we always try to do is build the right fail-safe mechanism so that even if something goes wrong, which is outside of our control, we can then maybe square off the position right away or intimate the customer and let them know that, "hey, something is wrong. You might want to take action". Those are the types of things that we're trying to do. But again, it's an iterative process.
Akshay: Why not try and build alliances and have TradingRooms within broker apps?
Raghu: That is something we have thought about, but that also dribbles. It promotes friction, but there are issues with that.
Number 1: most brokers are not going to be super comfortable with promoting an application such as ours, as things stand right now, because algo trading is still one of those kinds of areas which SEBI has not given a complete stamp of approval on. There's lot of things that we cannot do, for example, on TradingRooms, we are not allowed to showcase the performance of any room. That's due to a SEBI circular, which essentially says that these third-party platforms are not allowed to do that, which is enabling fully automated trading. As a third-party platform, you cannot explicitly showcase the ROI of the room owner. So what ends up happening there then is, the room owner is tasked with the objective of getting their followers to become aware of the room. It's not a deal breaker at all.
Akshay: They would, let share their ROI on social media and all, but they can't share it on TradingRooms.
Raghu: Exactly, which in certain ways might be the right way to do it, because when you think about introducing biases and things like that when it's coming from the horse's mouth, and not from the third party, even though we're not trying to mislead anybody, we're not showcasing anything, which is wrong. Unfortunately, other third-party applications, they don't disclose the right P&L and the P&L that is shown on TradingRooms is the actual P&L. We don't sugarcoat anything, but a lot of these third-party platforms, they don't do that unfortunately.
Because of that we have certain workarounds. But to answer your question, it's also about what do we stand for? And one thing that we stand for is- we don't want to really promote any one broker or the other. One of the major reasons I started Rain was to not be tied down to one broker.
In the sense that there are many brokers out there, and we don't want to be operating at that level. We want to be operating at a meta level above that and build solutions around that whole environment. But TradingRooms is actually just the first product. I talked about Rain Platforms and what we're trying to solve.
The reason for the company's existence is that we are trying to increase investor participation rates in India, period. Me and my co-founder, we've been around the capital markets our entire professional lives. My co-founder, his name is Harsh, he launched one of India's first offshore domiciled hedge funds coming from India.
So basically of Indian origin, his hedge fund was one of the first hedge funds to be domiciled outside of India. He comes from the fund management space as well, we're both very passionate about increasing investor participation rates. And one thing we've noticed, especially in the trading and investing community is, there is a bubble that we live in when we are in this space.
If you are affiliated with financial markets or investing or trading, or any sort of wealth management solution, you're mostly interacting with people within that space for the most part.
Akshay: You speak a different language, which a layman would struggle to understand.
Raghu: The analogy would be like, if you're an athlete, you're gonna be speaking to athletes or people who gets a sports world, even if you're not directly speaking to athletes, people who are affiliated with that space.
But the reality is, going back to that investor participation rate, less than 4% of the population has a Demat account, period. Now, if you ask the average person out there, do you know what the stock markets are? Just a very point-blank question. Or do you know what the Share Bazaar is?
They'll say yes. People know what the loss trade is. People have seen all the famous movies. They know who Harshad Mehta is. They've seen Guru and all these movies and stuff. People are aware. They know what the Sensex is. Then why is that disparity there? And I think the lazy answer when it comes to growing investor participation rates is that you have mutual funds, just get people to put their money into mutual funds.
But when you think about it, you're asking someone who knows nothing about nothing to put their hard-earned money into. It's a really preposterous like idea. That's not how we work as human beings. If you're asking me to be involved in any activity in my life, I'm going to read up on it, or I want to be taught something about it in school, or I want to become something because once I have some sort of perception of it, then I can make a better-informed decision.
You cannot just throw that ROI number to me and be like, "Hey, put your money into mutual funds". You're going to make X percent per year on average. Because first of all, that's not guaranteed. And because it's not guaranteed, I am not actually aware of those risks because I've never been exposed to them, because I don't know what the reason for those risks are.
I don't understand stock market prices, how they move, why they move, things like that. What we did basically around 8 months ago, my co-founder and I, we started working on our second product and our second product is called TradingLeagues. TradingLeagues is basically a fantasy gaming platform for trading and investing.
The equivalent is like other fantasy sports applications, let's say Rummy or Dream 11 India, or you have DraftKings and FanDuel in the US. And all these platforms, what's happening is you're not physically buying or selling anything. Like on Dream 11, you're not buying a cricket player.
You're building a simulated cricket team, and your cricket team is competing against other people's cricket teams, and the best performer cricket team wins. It's a skills-based activity and you can also make money from it, but you can also play for free. The same idea is what TradingLeague is all about.
On TradingLeagues, we're launching the app in a few weeks, but basically, it's going to have four different types of games and you're dealing with real-time stock prices, but it's not just stocks, it's also cryptocurrencies and other financial markets as well. And in the process of playing these games, you're learning about how stocks move.
And these are both free games and paid games. The paid games, the entry fees can be as low as 25 rupees. And the whole thing is competitive, hyper-competitive. So you're competing against other people in real time. The bet here that we're making with TradingLeagues is that this can become the mass gateway product for the average person out there who is just not interested in opening up a brokerage account. I cannot fault that person for not opening up a brokerage account as much as I want to, I'm still a very large shareholder of Upstox, and it would be awesome for me to say, "Hey, open up a brokerage account if you don't. What's wrong with you?"
But that's not the way humans work. Because people factor in all the information they know and genuinely what they know about something. And based on that, they make a rational, informed decision. As much as I want to say that person is being irrational, that's very lazy for me to say that.
And the reason people don't open up brokerage accounts is because you're asking them to do numerous difficult things, just the idea of moving enough money to a brokerage account is a big deal for many people. Because you're not moving like a thousand rupees, you're moving tens of thousands, if not sometimes lakhs of rupees.
For many people, that's a big deal, and even before they take that first trade, they're already psychologically in the red. Because it's not like they're jumping with joy when they move that money, they're moving that money with a certain amount of anxiety and stress. And then you're asking them to know how to trade, how to make trading decisions and not get stressed.
Due to all those reasons, we think a product like TradingLeagues can really get a lot of people excited about the financial markets.
Akshay: Help me understand the difference between a free game and a paid game.
Raghu: A free game is literally free. You play the game, there's no money transfer at all.
Akshay: In a free game also, there's a leader board and let's say you have a 10,000 rupees kitty to invest and like what you did in your school assignments.
Raghu: Exactly, it's just like the school assignment game.
You're competing against people. There's a leaderboard in version one, there's no chat. But in version two you're gonna have a real time chat. People can chat and share their thoughts. You're seeing real time prices come through. I'll give you one of the examples of the games. The most simple game on TradingLeagues is called Battle Leagues.
And on Battle League, basically it's a matchup of two stocks and you come in, and you pick which stock you think is going to outperform the other, and the game has a game duration. There's a start time. There's an end time. And all you're doing is saying, "okay, based on whatever I know about these companies, I think Stock A will outperform stock B.
You might have Twitter versus Facebook. You might have Apple versus Google, Ethereum versus Bitcoin or Zomato versus Paytm. Matchups of all sorts. So in a free game, there's no entry fee. You're just playing the game, and in that process, you're seeing the prices go up and down.
We're also trying to teach the users the very basics of how stock prices move and why they move and things like that. In a paid game, there's an entry fee associated. You're coming in and you're paying that entry fee, and then what we're doing is we're pooling all those entry fees together and we're creating a price pool.
And then all the people who pick the winning stock, that price pool gets dispersed to them. It's the most basic form of pooling money and then paying it out to the winner. So that's a battle. The second league type is called Target. In a Target League, basically each game involves one company and you are predicting the future price of that company.
For example, let's say you're dealing with Reliance Industries, and let's say Reliance is trading at 1000 rupees at 9:30 in the morning, and let's say the game goes up to 3:00 PM, you'll have a bunch of different price brackets, let's say the entry fee is 25 rupees and you have 10,000 people participating in the game.
So that means the whole price pool is 2.5 lakhs, and let's say out of the 10,000 people, 1000 people pick the correct price bracket, then that 2.5 lakhs gets dispersed to those 1000 people. So that's Target. The third game type is called Selection and in a Selection League, you're building a portfolio of stocks, between 4 to 6 stocks, and then you can apply leverage to up to 2 stocks, and then everyone's portfolio competes against each other in a simulated manner.
Obviously, all the transactions are done in a simulated way. The fourth game type is called Classic, and on a Classic League, you're trading off of a chart. You're getting introduced to the idea of charting and then you're buying and selling throughout the day. And then the person who performs the best basically wins the entire price pool.
Akshay: What is the meaning of trading off a chart? What does that mean?
Raghu: Trading off a chart basically means if you open up, let's say Upstox pro and you go to the chart. You can actually place a buy or sell on the chart. So basically like you're looking at the chart and you're making a decision to buy or sell.
Akshay: That is like the price moving up and down.
Raghu: Exactly, like a bar chart. If you have ever seen any sort of a bar chart, you'll see the green candlesticks. So the green candle, red candle- if it's a green candle, that means it's gone up. During that interval, the red candle- it's gone down.
You have these like a bar chart, and charting is very powerful to trading. Most traders, especially intraday traders, they're looking at charts. This is a gentle, easy way to introduce the user to what a chart is. And then you can click on the buy button whenever you think this is a good time to buy.
Let's say the classic league involves Bitcoin. Bitcoin is very volatile these days because of FTX, coin is moving all the time, very volatile. So you might have a classic game which runs 24 hours, let's say from midnight to midnight, and everyone comes in. If it's a paid game, they pay their entry fees.
And then you see the real-time chart going up and down. You can also apply some very basic technical indicators. All that is included on the app. And then once you think it's a good time to buy, you go in and buy, or you sell. So Trading Leagues is what we're launching.
Akshay: And it is the one who makes the most profit.
Raghu: We have different reward distributions. One is a winner takes all. Usually in a classic league, the winner will be a winner takes all, or we might have a first place, second place, third place so that's the basic idea.
Akshay: Is this categorized as real money gaming, which would then put some restrictions. I believe Play Store, App Store don't allow real money giving apps to be published.
Raghu: Those rules have actually changed as of the past couple months. If it is a real money gaming app, which involves skill, then we are allowed to publish this on the Play Store. TradingLeagues will be on the Play store. We're making the submissions, in less than two weeks, and then there's a process, a 30-to-60-day process for it to get approved, and then it will be available on the Play Store and the Apple App store as well.
Akshay: And if a teacher wants to use this for her class, is there a way to have a cohort-based approach here?
Raghu: A teacher can use it as it is right now, but if a teacher wants to specifically, let's say, create a competition just for the class, that is going to be happening in version two.
In version two, we're going to allow for the ability for publishers to come in and create their own private leagues. And with a private league, it's an invite only system and you can specify everything about that league. Whether it's free, paid, which companies you want to be listed. If you're doing a battle, for example, you could specify the companies, if you're doing selection, you can specify the universe of stocks and things like that.
That's going to be in version two, which will be launched very quickly after version one. Version two is also going to have a lot more asset classes. Version one will have access to Indian stocks, US stocks, and cryptos. One of the major things we also want to do with TradingLeagues is when people think about the stock markets, they think about their own country's stock markets. It becomes one of those kinds of obvious things, because I cannot invest in other country's stock markets. But because of that assumption, we never get exposed to other country's stock markets. You probably have never seen a Brazilian stock in your life, like you've never seen a Brazilian stock up and down. Why would you? But that's unfortunate. Toyota, for example, I believe trades on Japan's exchange, and yet I've never seen Toyota prices go up and down. So we're also trying to expose different stock markets.
The idea is to really categorize things and everything comes back to investor participation levels. Our bet is that once people start using TradingLeagues, then at some point in time when they feel that the time is right. They may and actually open up a brokerage account. And our kind of longer-term vision here is actually a lot of TradingLeagues users would go to Trading Rooms.
Because now they have money to open up a brokerage account, they can fund it, but even there, the same pain points exist. People don't have time to actively trade the stock market because they have jobs and things like that. So they can actually use the same login Id on TradingRooms and trade over there. That's the thought process.
Akshay: How do you monetize? I'm guessing in TradingLeagues some percentage of the money collected for a paid game would be kept by you. You would've some take rate over there.
Raghu: It's exactly that. Just like other similar types of skills-based games, we take a percentage and this is a pretty well-known business model. Same business model gets used by DraftKings, FanDuel and other gaming apps in the US.
Akshay: What is that percentage range? What does it range between?
Raghu: It's going to be close to 20%. But what happens is it actually depends on the game because there is a concept known as a guaranteed prize pool.
Guaranteed prize pool basically means regardless of the number of players participating, there is a prize pool. When I join a game, if I see that there's a guaranteed prize pool, it increases the likeliness of me joining that game. Because in my mind it's all nothing to lose. Even if enough players don't play, I can win.
But because we're taking on that risk on a guaranteed prize pool, then our percentage also goes up. Obviously, it's going to be disclosed on the app and the game will clearly specify what that percentage is, but it really depends on the game. And then on TradingRooms, we take a percentage of each room's subscription fee.
Akshay: And typically what is the subscription fees?
Raghu: Subscription fees, again this is a compliance thing. It cannot be a profit share. It has to be either a monthly or quarterly, a fixed amount. It usually ranges in the thousands of rupees. Now, the way we've done that also is we have tried to be very fair. Let's say I'm the room owner and I charge a certain amount, let's say a 1000 rupees per month. Let's say you come in with 1 lakh rupees, another person comes in with 1 crore rupees. Technically, that guy should be paying a 100x versus you. We have that built in. What happens is, it's based on the user's margin. There is a certain subscription fee that is charged.
So for each X rupees and margin, which is basically the account balance, Y rupees has to be paid in. But usually it averages out to 1000 to 2000 rupees per month. The average account balance would be maybe 5 to 10 lakhs. So that's how it plays up. But some traders have amazing track records and they can charge whatever they want.
Another interesting thing that's going to happen, especially after the mobile app gets launched is that: see the mobile app is required because otherwise people don't have access to TradingRooms easily. Right now they have to go to the web, people have jobs and things like that. So they're not able to easily access the web.
But once the mobile app launches, it's going to be launched for accessible. One of our bets with TradingRooms is that essentially there's gonna be interesting dynamic that happens where the expert traders will have to decide what to charge. Do they go after scale or do they go after high fees on a per-user basis.
Because a lot of these strategies are limited by liquidity. Even if I have an excellent strategy, I may not be able to scale it across a lot of people. That's the beautiful thing about the markets, the markets are just so dynamic like that.
Akshay: Does somebody who is offering his portfolio on TradingRooms, does it need to be a SEBI registered investment advisor?
Raghu: As of now, the answer is 'No', based on the current regulations, especially since SEBI has asked for the performances to be withheld from the rooms across all platforms. As it stands right now, the room owners basically do not have to bid with any sort of regulatory body, but that can change.
These rules are always in flux, and that's the beauty of something like TradingRooms. It's designed in such a way, such that it can quickly adapt and change. Even tomorrow, let's say some crazy rule comes out and fully automated trading is not allowed anymore. If that happens, no problem.
We will send a notification to the user being like, "Hey, this trade is about to be taken on your brokerage account. Click Yes to approve, click No to reject". So these things are all very much possible.
Akshay: And let's say I sign up for a TradingRoom. Do I then commit a certain amount of money in my Demat account to this and that money gets locked in that I cannot then touch that money. How does it happen? Because you would need some sort of a lock-in. Because if you want to execute strategies, then.
Raghu: There's no lock-in per say, because that money stays with the user. The room owner never has access to. One of the reasons why that requirement of, you don't have to be a SEBI registered IA is because there is no access of funds.
When you come in and join a room, that's your brokerage account and no one has access to your brokerage account. Whether it's TradingRooms or the room owner. Only you have access to it so you can do whatever you want with it. Now, it's not in your best interest to put money in the morning and then take it out at the end of the day, especially if there are open positions, because that's going to create chaos for the logic in the room.
But as far as the minimum amount is concerned, that's determined by the room owner. So the room owner will say, "Hey, if you wanna join my room, you have to have at least X amount of money in your brokerage account, otherwise the trade won't get taken". It physically cannot get taken because everything is done algorithmically.
So the program can detect the margin and based on the margin, it knows whether the person has enough money or not. But it's basically- each party has access only to their own stuff. So the room owner, their secret sauce, never gets divulged to anybody, doesn't get divulged to us, doesn't get divulged to the room user. And the room user doesn't get access to the secret sauce of the room owner.
Akshay: But the room you said would see the history of trades.
Raghu: History of trades doesn't say much. It doesn't tell me why the trade is getting taken. The secret sauce is always in the 'why'. It's not in the actual result.
Unless the person is doing some time determinant, like an arbitrage strategy. But that's not going to happen on TradingRooms. If you're seeing the trade history on TradingRooms, that means it's gonna come to you because you get the contract notes, the exchange contract notes go to you, they don't go to the room owner. You're going to see all the timestamps and all the trades being taken anyways, so if it's actually so secretive, then no one is going to actually set up a room on trading. For example, if I was running, let's say this technology existed when I moved to India and I was running this NSE BSE arb, I would never think of listing it on a marketplace like this because that's the secret sauce.
The secret sauce is the fact that the strategy is so simple that people can easily recreate it.
Akshay: We can figure out just by seeing what the history of trade is.
Raghu: Back then when we used to trade, we used to tell people that we were doing the complete opposite because it's just how it is.
We would be like, "yeah, we're trying to find the fair value of the price by using The Black–Scholes model" and all these fancy terms just to throw them off. But now those models won't work. There is too much competition.
Akshay: Have you raised money for Rain Platforms?
Raghu: We have raised money from friends and family, and it's been largely bootstrapped by me. And then we raised capital from friends and family. Then we're going to be going for our series A, in early to mid-2023. After the app launches, we're going to be going for a series A.
Akshay: How big series A? 10 million series A or 40 million series.
Raghu: We haven't actually decided that to be completely honest. I think it really depends on the types of conversations that we have. There is a current valuation that the company kind of enjoys, based on whatever investments we've taken on so far, and so we will be very strategic with that. My general philosophy with raising capital is you should raise what you need and a little bit more.
Now, others have different philosophies. People will say, if it's a good time to raise as much as you can. I personally don't buy it to that. My general mantra with all these things is you should always have a buffer. You should always be in a situation where you don't need to think about stupid things.
But having an endless amount of capital, I think leads to sometimes rash decision making without even knowing about it. It's because it's very easy to justify bad decisions, when you have almost like an unrelated amount of capital to work with. So we'll make that decision. Obviously, it depends on how this conversations play out. The current culture climate right now is interesting, but I think when it comes to our kind of offering, due to the uniqueness of it, we won't face too many challenges.
Akshay: But can you bootstrap it if you so decide to.
Raghu: I do need capital, but when it comes to our philosophy, it’s actually that it's always better to raise.
Because when you raise, you are able to first of all, leverage a lot of relationships and you're able to bring a lot of tangible and intangible aspects to the business that wouldn't otherwise exist if you didn't raise capital, especially if you raise from strategic investors who can actually add value, not just the capital.
In our case, we will definitely raise and I think it should be fun times.
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