Why ‘Finfluencers’ Will Always Find Addicts

(Bloomberg Opinion) -- In May, India's market watchdog acted against a self-described options trader, allegedly for selling investment advice via the Telegram messaging app without the requisite registration with the regulator. As part of the settlement, P R Sundar, his wife, and their jointly controlled firm agreed to a one-year ban on buying or selling securities, without admitting or denying that they had broken any laws. They also wrote a disgorgement check of more than $700,000, including interest — a tidy sum for a former math teacher in Chennai.

If the Securities and Exchange Board of India had hoped that its action would produce a chilling effect across the country's fast-growing horde of unregulated financial influencers, that didn't happen. Which is why the Indian regulator has now decided to go beyond  individuals. In a recently circulated consultation paper, it vowed to “disrupt the revenue model” of “finfluencers” by forcing all regulated entities to cut ties with them.

Will the new gambit work? Globally, investing has became a type of entertainment. During Covid-19, brokers used digital nudges, such as apps raining down animated confetti to celebrate success, to turn high-risk trading into a cool game. While the pandemic has faded, the addiction continues, amped up by social-media punditry.

Zero-day options, which expire the same day they're traded, gained popularity as a tool to speculate on meme stocks. They now account for more than 40% of all options on the S&P 500 Index, with retail participation possibly as high as 30% to 40% of the total volume. It's a similar story in India, where popular contracts are now lined up to expire every day of the week. In traditional cash securities, retail and proprietary traders' share has fallen to 63%, from 70% in the 12 months to March 2021. In index options, it has surged to 84%.

Everyone wants a piece of the retail action. “Low cost of trading and proliferation of products to trade” have led to a “relatively sticky base of monthly active retail clients trading options,” Mumbai-based Kotak Securities Ltd. wrote in an Aug. 24 note. The 148-year-old Bombay Stock Exchange, which trails behind its much-younger rival, the National Stock Exchange, has increased its share of index options from virtually nothing in June to 5%, thanks to weekly contracts in its benchmark 30-share index, the Sensex, according top Kotak's estimates.

There is intense competition ahead for intermediaries as Mukesh Ambani, India's richest tycoon, takes his newly minted Jio Financial Services Ltd. into digital broking, where one of the cheapest ways to acquire customers is via referrals by finfluencers. They're the ones teaching the secrets of puts and calls to their followers, sprinkling their training courses with advice on what to trade — and where.

Everyone has a right to earn a living, and advertise their skills. What is not so legit is when finfluencers brag about performance using shenanigans like fake screenshots of imaginary profits. This lying is not harmless. A buyer of toothpaste doesn't really believe its boast — she knows the claim to kill 99.6% of germs is puffery. However, fininfluencers' stories of personal successes have a different effect on the psyche.

Those who want to get rich overnight have a strong need to believe in the infallibility of their chosen guru, which is how they avoid reckoning with the reality that nine out of 10 individual traders in India's equity derivatives market lose money. That these clever messiahs hawk training programs for a living — and don't use their superior acumen to run a family office, or at least a hedge fund — never seems to deter true disciples. 

With dishonesty rampant, truth, too, has a market, albeit an imperfect one. When Zerodha, the country's largest retail brokerage, started offering a verified link to a customer's profit-and-loss account, some traders cherry-picked dates to spin tales of their wizardry. Sensibull, an online options-trading platform, verifies its users' returns based on the trades they post with brokers like Zerodha and 5paisa. Still, a single trader can use multiple accounts and intermediaries to hide duds and publicize winners. Just like bad money drives out out good money, chicanery will always triumph over honest accounts of true performance. There's no escaping Gresham's law.

Business television in India is rife with news anchors and experts peddling buy/sell recommendations. That's hardly a new development. With some exceptions, the regulator has tended to look the other way, presumably thinking that all this must somehow be helping a country with low penetration of institutionalized finance boost security ownership. This may even be a necessary evil, as the above-board market in advice is puny: The nation of 1.4 billion people has fewer than 1,400 SEBI-registered advisers. 

With the rise of the new-age influencers, though, the problems of conflict and fraud have gotten out of hand. Can they be tamed? I doubt it. The world over, politics has seen a more lethal commingling with social media than finance. Government ministers in India recently courted controversy by giving interviews to a YouTuber, popularly known as the “Beer Biceps Guy.” General elections are due next year, and the youth vote is up for grabs. Similarly, firms facing questions about their governance are using social-media shills to counter bad news, and get their stock prices up. SEBI may be serious about sweeping its own corner of the house, but the windows are broken, and there is a dust storm outside. 

Take, for instance, YouTube's Hit Pause media-literacy campaign. The video-sharing site recently released an ad, jointly with India's ministry of electronics and information technology and other sponsors. In it, the public-service message that one should “trust only the real experts” came from — yes, you guessed it — a finfluencer. Her social-media handle was also included. In the current zeitgeist, SEBI is fighting a losing battle.

More from Bloomberg Opinion: 

• Being a Finfluencer Is Fun — Until You're Fined!: Paul J. Davies
• Finfluencers Are on the Rise. Should You Trust Them?: Erin Lowry
• Matt Levine's Money Stuff: Be Careful With Your Finfluence

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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