D-Street diary: FONO, Insta(gram) investors, Abbott’s red carpet for fund managers

In the short term, Paras—as the name means in Hindi—may help some junk IPOs pass off as gold.

In late June this year, fund managers at domestic fund houses and portfolio management service (PMS) firms were surprised when they got an invitation for a call with the Abbott India management. That is because in the past, such calls with the company have been as rare as Halley’s comet. The call was not an interactive one; participants were in a ‘listen only’ mode. The top brass responded to ‘as many questions as it could’, all of which were ‘received in advance’.

The fund managers appear to have left the meeting impressed, because the stock has been consistently outperforming the pharma index by a wide margin since then. Two months after the analyst call, the NSE announced it was adding 8 securities to its futures and options (F&O) list effective October 1, Abbott among those. And while the stock may have ticked the relevant boxes for inclusion in the hallowed list, many wondered at the choice given that daily volumes in the stock have ranged mostly between 10,000-20,000 shares. Lower the liquidity in a stock, easier it is for some vested interest to control the moves in the derivative segment.

In the week leading to October, Abbott India saw some sharp swings. A fund house is a said to have dumped a fair-sized lot, sending the stock into a tailspin. But it quickly rebounded, as some HNIs, who had been lying in wait, swooped in.

Options traders have been noticing a strange trend in weekly Bank Nifty contracts. On expiry day, when the index has been falling, there is a sudden demand for deep out-of-the-money call options, leading to a spike in the premium of those contracts. A similar anomaly has been spotted when the index is rising on expiry day; there is a big demand for deep out-of-the-money put options. Ideally, premia for such deep OTM contracts should be falling on expiry day and even otherwise, it makes no sense to go for such contracts when the market is moving in the opposite direction.

Initially, these swings were thought to be the result of fat finger trades or newbie traders with no understanding of how options worked. But turns out that some smart traders are using this strategy to free up a part of their margin funds locked up with the exchange. The rationale here is that it helps limit the effective value at risk if prices move adversely, as the deep OTM trade sets a cap or floor. Of course, there is a cost to buying deep OTM contracts. But if the freed up margin can be used for a much more profitable trade, then ‘why not’? is what some traders are saying.

You have heard of foreign institutional investors (FIIs) and domestic institutional investors (DIIs). But the category which is right now powering the bull run in mid and small cap stocks is the III- Individual ‘Insta’-gram Investor, as some in the market would like to call them. This group can be seen hanging out on social media platforms-notably Twitter and Instagram—following as many market gurus and pundits in the hope of some market wisdom/tips than can help them make some instant profits. This is leading many companies to seek the services of market gurus with a huge following to endorse their stock. The modus operandi works somewhat like this: the celebrity buys a sizeable quantity of the stock and announces it on social media. This will immediately bring IIIs rushing in. The promoter will underwrite losses if any, and the celebrity gets to keep the upside. What’s in it for the promoters? A rise in the stock price benefits them as they play in much bigger quantities with the help of traditional market operators.

Till some months back, the Fear Of Missing Out (FOMO) was prompting many retail investors to invest in equities and mutual funds even if they had little or no understanding of what they were getting into. With fixed deposit rates now at rock bottom, there is another factor making many people desperate for a piece of the stock market action. And that sentiment can be called FONO—Frustration Over Neighbours’ Opulence. The other day J, a small business owner in his early 40s, who operates out of the same co-working space as this diarist, seemed distraught at the market making new highs every day.

“I have to invest in stocks,” he told me.

When asked why:

“My friends, who don’t know the A of stock market have made a lot of money from the market in a short time. I wonder what is wrong with me. Why can’t I make money like them?”

A couple of things here. One, everybody looks smart when the market is rising one way. The true picture will emerge only once the bull run ends. Two, your neighbours/friends/relatives will only brag about their winning trades. Few will be honest enough to talk about their losses.