If these organizations don’t register themselves, there are thousands of dollars to be made off of retail investors.
Using illiquid stock options with big lot sizes is the secret to success.
The Securities and Exchange Board of India (SEBI), the market regulator, has received many justifications for why finfluencers, or financial influencers, do not want to be registered as research analysts (RAs). Among these justifications are the limitations on trading stocks they have recommended and, consequently, live trading.
The market regulator may at any moment request information about a registered RA’s trades. This is done to make sure the analyst isn’t engaging in any trading that is against the law (such purchasing a security before 30 days and after five days after their recommendation, for example), according to a RA filed with SEBI.
What then are these instruments?
Both front-running and a pump-and-dump plan include the use of illiquid or just moderately liquid stock options.Because profits are only realized when the price of the security may be moved, even by a few rupees, they use illiquid options. It is challenging to adjust the price if they are very liquid.
Telegram or any other social media platform is used in the pump-and-dump strategy. A Telegram channel may have up to 10,000+ subscribers with ease. Let’s say an option trades for about Rs 20. The finfluencer or his/her partner may purchase a number of them before placing a call on the channel to purchase them for Rs 21. The finfluencer will then earn Rs 10,000 (10×1,1000xRe 1) from just one subscriber if they sell 10 lots of 1,000 shares each. A day’s profit of Rs 1 lakh can easily be made if 10 of the 10,000 subscribers choose to heed the finfluencer’s recommendations. That is from just one Telegram channel; there are typically at least two or three active ones.
Selling spoiled fruit
The second racket involves handling money. On their social media platforms, many finfluencers promote their rags-to-riches tale in an effort to attract followers for their illicit money-management business.
They use the client’s trading account information to execute trades on the client’s behalf when managing the client’s money.
They purchase an illiquid stock option from the customer’s account and sell it for a price over the market price in order to profit from the client. The client’s account is where the loss was incurred.
The customer is left holding the illiquid option while the influencer claims it was an honest error, and they square off their position by purchasing the option at the reduced market value.
Similar to a pump-and-dump scheme, if a client is sold merely 10 lots with 2,000 lot sizes at a profit of Re 1, the client may not feel the pinch of Rs 20,000 very much. However, the finfluencer can earn Rs 1 lakh per day if they achieve so with just five clients, according to an insider.
Using huge lot sizes of illiquid stock options is the key to the success of both strategies.
Littler fraud
There is also, albeit to a lesser level, a tax evasion scheme. This is only a small portion of the business since it requires a lot of talent, a larger network, and the willingness to accept the greater risks associated with tax fraud against the government. The current tax scam operates as follows.
Consider a scenario in which you earned Rs 50 lakh through trading while finfluencer A lost Rs 50 lakh. Through a loss-making transaction, you can ‘transfer’ your profit to the influencer and evade taxes. As a result, both you and the influencer are in net loss (because the influencer’s initial Rs. 50 lakh loss cancels out the profit you transferred and you have no taxes to pay).
How do I transmit this?
You ask the influencer to sell an option that is very far out of the money at a price that is far more than its market price. You might urge the influencer to sell the option for Rs 25 if it is already selling at Rs 5, for instance. There won’t be any other buyer because it is so much higher than the market price. After purchasing this option, you quickly sell it back to the influencer for, say, Rs 5 less. Overall, the influencer has earned Rs 20 and you have lost the same amount.
250 contracts, each with a 1,000-lot size, would require a transfer of Rs. 50 lakh (250 x 1,000 x Rs. 20).
The influencer then transfers the money back to you via a hawala transaction or a company established up in a tax haven like Dubai. Since there are no restrictions on transferring money between different offices of the same business, the influencer will establish an office in the other country and send money there.
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