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The tragedy in the markets

Derivatives trading continues to lure and destroy retail investors

Market mayhem: The dark side of derivatives tradingAnand Kumar

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Last week, I wrote about scamsters who take people's money, promising to generate profits on the stock market, but eventually lose it all, forcing them to flee or face jail time. I mentioned Shivraj Puri, who was first arrested in 2011 for scamming Citibank customers in Gurugram out of about Rs 400 crore while working as a relationship manager. Puri was arrested, skipped bail, and was re-arrested six years later, eventually dying in jail a couple of years ago. While he was undoubtedly a scamster who robbed people, the strange thing is that, in a way, he was also a victim of what I believe to be the real scam in India. Although the source of his money was criminal, as an investor, he was just another casualty of the market.

Thirteen years ago, when this case first came to light, I had written this:
Citibank's rogue relationship manager apparently blew up most of that money on the stock markets. Specifically, he seems to have been trading in Nifty derivatives. I almost wish that he had instead run off with the money and was now sunning himself on a beach in the Caribbean, wearing a false beard with the money safely laundered into a Cayman Islands account. But ... like (other) traders around the country, he found the lure of 'effendo' too strong.

I know the whole story about how derivatives provide depth and breadth to the stock markets, but for a vast majority of retail investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction. According to the Gurgaon police, Puri purloined Rs 300 crore, leveraged it up to Rs 1,200 crore and then managed to shrink that down to Rs 175 crore when, in November, the Nifty refused to behave as he had expected it to. The only thing unique about his story is the scale and the fact that he had stolen the money he was trading with. There is no shortage of people using their own money and then losing most of it.

Note that nothing I wrote 13 years ago has become dated. In fact, it's even more relevant. That was 2011, and here we are in 2024, and things have become even worse. The stock exchanges have dropped all pretence of not being in the casino business. They have shamelessly launched any number of products-like the ridiculous daily/weekly expiry derivatives-which have no use except gambling.

On top of that, the launch of online brokers and trading through apps has meant that people trade all the time as a side activity. When you see a crowd of youngsters hunched over their screens in an office lunchroom, not all of them are on Instagram-many are on brokerage apps, placing trades that will eventually cause them serious financial harm.

This has resulted in the craziest growth of derivative trading activity in the world. Last year, there were a total of 85.3 billion derivative contracts traded in India. Ten years ago, this was around 1 billion. 85 times in ten years. Even though the number of contracts is not a precise measure of the underlying impact, it's a good indicator of the madness that has taken hold. The saddest part is that a large proportion of these market participants think that this is what the stock markets are. Fundamentally driven long-term investments are simply not on their mental horizon.

There was that now-famous SEBI study last year that showed that some 90 per cent+ of derivative traders lost money. Many of us had expected that the study would be the first step in some kind of regulatory tightening of the casino activity, but nothing happened. New gambling products are being launched, derivative volumes are shooting up, and traders' money will keep flowing into the pockets of the industry fat cats. All is well-everything is continuing exactly as it was.

Also read: A black hole for your money

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