The Rise Of The Noise Trader

With the advent of discount brokers like Zerodha & Upstox and a surge in internet access, thanks to Jio, it has led to an increase in the number of traders, especially from Tier 2 and Tier 3 cities like Ranchi, Chhattisgarh, Chandigarh, etc. ICICI Securities has reported an increase of 50% year on year growth of new investors; this can be attributed to the increased time spent at home and the need to build alternate sources of income. India has seen about 20 Lakh new Demat accounts opened since March which has surged the markets upwards despite the COVID induced sell-off. Zerodha and Upstox have also roped in a few Social Media Influencers to promote investments and new traders in the market and regularly leverage these platforms to target the youth; Upstox works with YouTubers like UrIndianConsumer, Carry Minati & Aman Dhatarwala, all of whom boast of more than 10 Lakh Subscribers on YouTube. With this new surge of investors, we get a lot of Noise Traders in the market too. Most of these new investors/traders can be termed as ‘Noise Traders’ or traders who trade with partial information and a whole lot of biases. Noise Traders are known to drive prices away from fundamentals and being swayed by their emotions/overconfidence; they basically trade on technical indicators and market sentiments hoping that they will beat the market returns. To accurately notice the impact of Noise Traders, we should look at the event of 23rd April 2013 wherein a fake tweet claiming that the White House was bombed and President Obama injured, immediately sent markets crashing. Although the market recovered within four minutes, this incident exposed the network of supercomputers that constantly scan headlines looking for keywords that are programmed to sell equity positions when the right words are flagged. But is it actually bad for the markets? Long answer short, no. Presence of Noise Traders ensures that the market has ample amount of arbitrage opportunities and the big sharks like Rakesh Jhunjhanwala exploit these opportunities. Without Noise Traders, no one would get rewarded for having more information or doing more extensive research on securities. Although, the individual investor will suffer if he/she fails to notice the fundamental value of their investments. The Grossman- Stiglitz Paradox describes this better, they define trading as a zero-sum game or a game in which one person’s gain is another’s loss. If only informed traders trade among each other, they will drive out the profits and the aggregate profit would end up being negligent. This goes to prove that information has a quantifiable price and the informed investor is exploiting it on the uninformed investor's expense. Institutional Investors usually have more advanced and reliable sources of information which ensures that they are ahead of the game and in a better position to analyze securities. Basically, any trader who is trading on inaccurate data and believe it or not, most of the traders are Noise Traders and are often subject to biases. They are known to trade on hype rather than on solid technical or fundamental analysis, an example would be traders hoping on the Tesla bandwagon without understanding the fundamental value of the firm. It all points to one thing and that is, in the market, information is rewarded, and the presence of Noise Traders facilitates arbitrage opportunities for the more experienced professional who is eagerly waiting for that moment. Be patient and let the fundamentals prevail! References https://medium.com/@byrnehobart/what-we-talk-about-when-we-talk-about-stocks-e5327f62a750 https://www.theweek.in/news/biz-tech/2020/06/25/zerodha-adding-double-the-number-of-customers-per-month-than-pre-covid-days-ceo.html https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/noise-trader/#:~:text=A%20noise%20trader%20is%20an,solid%20technical%20or%20fundamental%20analysis https://www.marketwatch.com/story/this-day-in-history-hacked-ap-tweet-about-white-house-explosions-triggers-panic-2018-04-23 https://economictimes.indiatimes.com/markets/stocks/news/how-lockdown-triggered-an-influx-of-new-investors-to-equity-market/articleshow/76190321.cms