Rumor Has It

There is this one thing that fascinates participants in Indian capital markets. So much, that it cuts across the Glass Steagal (pretty much non existent in India) wall between investment banks and brokerages. And also between brokers and asset managers of any shape, form or intent.

That one thing is rumor

“But you know what – that <insert name of vendor> is better because it gives me rumors. What is happening in the market I already know, boss”, is a common refrain I hear when one holds up the virtues of a particular information source I used to vend a few months earlier over another (everyone in India calls everyone else “boss” – it is all a very democratic structure). Interesting part was that it was understood – and accepted – that rumors will not always be true but it gave the marketman something to go with. A place to start. And engage in a playoff that had expected returns of a long run experiment of flipping a coin

The greater acceptance of rumors for investment and transactions is a bane in Indian capital markets. The practice puts greater emphasis on information arbitrage over painstaking research. Information arbitrage is a good thing when the game is played with insights drawn from equal primary sources – the edge bestowed upon skills of secondary research and applying analysis techniques more effectively. The easy access to rumors makes for very bad habits, which tend to not only die hard but also rots the core of business ethics

The rise of algorithmic trading implies unprecedented use of primary information by computer programs to trade securities. This in turn makes primary data almost useless for human initiated investment decisions. This actually should have been a positive step in the evolution of investment research but unfortunately there opened an easier access to arbitrage – rumors. Rumors which in several cases became impossible to distinguish from information possessed by a select few consequent to their proximity and exclusivity to the information. Yes, insiders

Information was – and even today is – not accorded its true value in India where the assumption is that any information should essentially come without any cost! Though the ambulance chasing capital market crowd is only too happy to pay for rumor. My personal point of view is that in the medium term this rot will deepen as information propriety is not very sacrosanct in corporate India. The process will correct itself when the law of large numbers take over in what is essentially a coin flipping exercise. Or when someone like Eliot Spitzer comes in with a large bottle of disinfectant

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