Friction #13: The conundrum of stock recommendations

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Editor's note: On 13 January, a first-of-its-kind event took place. Markets regulator Securities and Exchange Board of India took action against a TV anchor for allegedly indulging in fraudulent trades based on advance information.  Hemant Ghai, host of multiple shows on Hindi business channel CNBC Awaaz, was barred from the securities market and directed to stop giving investment advice or making stock recommendations till further notice.  Ghai is accused of “front running”, i.e., trading in stocks based on insider knowledge of a future transaction that will affect their price. His mother and wife are alleged to have synchronized a large number of “buy-today-sell-tomorrow” trades in tandem with the recommendations made on the “Stock 20-20” morning show that he co-hosted.  The modus operandi of the Ghais went something like this—Ghai’s wife and mother would buy a substantial number of shares of some companies. The bulk of these companies were then recommended as “buys” on the show the next morning. Once the markets opened, they would then sell these shares. The heightened level of interest in these stocks generated by the recommendations led to …