Tuesday, August 6, 2024

Influencing the markets: Book review Financial Express August 4, 2024

 SEBI has been voicing a lot of concern on the role of influencers who tend to ‘guide’ naïve investors into investing in the market and take a lot of risk. Another trend that SEBI has been flagging is the retail participation in the F&O (futures and options) segment. This is very specialised and not meant for lay investors. One needs to understand the concepts and also be aware of the dynamics of how they work; and hence requires professional knowledge. But the allure is always there and individuals have been taking very large positions in this market. This has been going on for quite some time now and the regulator is at pains to warn investors and control such influencers.

The regulator’s concerns fit in very well with the book under review, The Trolls of Wall Street by Nathaniel Popper, which gives a real-life account of how trolling—which is basically opinion gathering on stocks through social media— bloomed, especially during Covid times. In the part-biographical book, the protagonists are described as being self-proclaimed “degenerates” who made an obscure subreddit into a cultural movement that moved from the fringes of the Internet to the heart of Wall Street. It was a way of changing the way one looked at global financial markets and marked a different kind of thinking on money and investing.

There were young people who were generally dissatisfied with the pace of their lives and wanted to do ‘something exciting’. What better way than to start their own group on Reddit, which becomes a subreddit, and then discuss and exchange notes on where to invest. The passions were high and the approach was aggressive as decisions are made by those in the group. More people join the sub-reddit and large investments are made. And the trolling just continued to spread across the community.

The book is written more like a story as it tracks the life of Jaime Rogozinski and how he got this idea and developed it. Jaime and Jordon Zazzara were not really significant players in the market, but their obscure subreddit called WallStreetBets focused on risky trading, which made it a major disruptive force in the market. WallStreetBets was founded when the process of ‘Occupy Wall Street’ was happening. While they were co-founders, they were also rivals. There had been an alienation and disenchantment with the financial world, and people had largely pulled out of stocks post the financial crisis. Such a venture attracted over 15 million members, which then made it easy to influence share prices. This was disruptive because the amount invested at one time could disturb the prices of the companies that they were targeting. While it was set up in 2012, it gained traction during the Trump years when the youth was generally an angry lot who wanted to make money quickly and distrusted the world and its conventional ways. The community gained traction at a time when several young men decided that they were just aggrieved enough to become vocal Trump supporters. Also, they were piqued by what they felt were the ‘unfair economic cards’ they had been given post the recession of 2008.

The problem in such actions is that Wall Street boomed when the Fed was pursuing quantitative easing when a lot of money was provided to the system. This was also the time when cryptocurrency gained prominence, as witnessed by the very high valuation of digital currencies like Bitcoin. In fact, a lot of parallels are drawn by the author on investing in crypto with this ‘trolling’ as the mind-set was the same. Once the withdrawal started taking place, there was necessarily less money left to invest, which also caused markets to shrink. This is one where investors were caught in a cesspool. While some continued to stay invested and moved away from the riskier portfolios, the rest left after suffering losses. This market is anyway a zero-sum game.

There is data provided by the author to show how first-time investors fell into the trap and lost money. This is the constant fear in such cases where a follow-the-leader approach to investing is taken. The hard-hitting lesson was that investors have to be careful when balancing risk and, more importantly, keep out of derivatives unless they have a thorough understanding. But the story out here just reveals the power of social media where large investments are made with fair chances of gains or losses.

There is this example given where this class of investors attacked GameStop. There was the build-up of crowdsourced research effort that was used to understand and dissect what went into this stock and the company. Interestingly, after Covid, retail traders really dived into the markets and this was a time that Wall Street was incredibly bearish as it was assumed that the world was moving towards a huge recession. Retail traders were the only group that was betting on economic recovery. They seemed to do a lot better than hedge funds and institutions.

These are hence warnings to all regulators and investors of the power of this force that has caught on across the world and could be difficult to track and control. One may never know how decisions are taken by such groups. The Trolls of Wall Street is more of how such collective group thinking could pull stocks up or down. But the larger concern is the temptation for individuals with little knowledge to follow these actions. This book clearly endorses SEBI’s concerns on influencing and is quite powerful as the messaging is direct.

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