Stock front-running has moved along with the changing times

Now, let’s say an expert suggests that investors on a given day should buy a particular stock, aware that this recommendation would lead to an increase in buy orders for it, driving up its price. As the price rises, friends of experts who had advance information of the recommendation would sell the stock they had already bought before the TV announcement, and thus make a profit. This money would then be shared by these profit-makers with experts.

Front running in stock markets is an age-old phenomenon, probably as old as stock markets themselves. Nonetheless, the rise of business TV channels and online advisors has made it easier.

Business TV channels started to become a force to reckon with around the turn of the century. Before that, anyone trying to front-run had to spread information through word of mouth and then hope that enough people act on the tip. But with the advent of business TV, anyone intending to front- run a stock could broadcast it as a recommendation and get things going. Now, with social media, even those who are not in a position to appear on business TV channels can front-run stocks through online posts, reels and stories on popular platforms.

Here is a sample of investment advice made in some reels seen by this writer: 1) Before 2028, ₹50,000 will become ₹50 lakh by investing in these powerful stocks.... 2) Here are financially strong penny stocks under ₹10 and ₹20 that you can invest in.... 3) In 2024, these are the powerful shares you should invest in. Your ₹50,000 investment will turn into ₹1 crore.... 4) Just close your eyes and invest in these three penny shares in the solar energy sector....

Each of these short reels featured a lot of hyperbole and expressed certainty over making a lot of money. And they had thousands of ‘likes’ from those watching these reels. Now, who is to say that individuals making these reels aren’t also front-running, like those appearing on TV? Social media in a way has democratized the practice. Earlier, one had to appear on TV or have some standing in stock investment circles to think of indulging in it. Now anyone with a smartphone can think of doing it. As Michael Kemp writes in The Ulysses Contract: “Digital platforms have, unfortunately, provided a voice to the unenlightened, who are using this voice to guide the blindly unaware."

The question is why retail investors trust such individuals. First, figuring out stocks to invest in on your own requires a lot of reading and thinking. Given this, investors have always loved others giving them stock tips. Earlier, these tips would be spread through word of mouth, but now they can reach large numbers across social media and front-running can easily happen. In that sense, there has always been a market of investors who want to be actively lied to, and that market is still the same; only the mode of delivery has changed. As Kemp puts it: “Why bother undertaking all that hard work when social media delivers the answer right there in the palm of your hand?"

Second, in an environment where stock prices have been going up, even random stock recommendations can end up doing well. This helps those offering stock-buying advice on social media attain popular credibility. As Robert H. Frank writes in Under the Influence: “Profitable exchanges are possible only when people can trust one another." Rising stock prices help accentuate this phenomenon. There are many such stories in the market right now. The stock prices of companies with very poor earnings and not much of a future have gone through the roof.

Finally, how can a stock market regulator regulate something like this? Front-running on TV is relatively easy to identify, given the existence of recordings of what was said. The same pattern on social media is very difficult to spot, given that so many recommendations are being made. How does a regulator that works only office hours keep track of a market that operates 24/7? Also, reels and stories can disappear.

As the Sebi order said in the Zee Business case: “It is necessary for investors to exercise due diligence while listening to such experts on TV or on social media." Or, as Kemp puts it: “There are plenty of benefits that come from the ongoing digitalisation of our world, but gaining a financial education from a smartphone isn’t one of them."

The trouble is that investors who are punch drunk on short-term gains aren’t really going to buy—for lack of a better term—this global gyaan (knowledge). For them, the night is still young and there is a lot of money to be made. The regulator can only watch from the sidelines. And, as and when things take a turn for the worse, it can just about whisper, ‘We told you so.’ But that’s not going to help anyone.