Verified trading P&Ls are fine, but be wary of the loopholes

For most retail investors, the lure of easy money was irresistible as these influencers promised to share their ‘expert’ guidance on trading in futures and options (F&O). This expert guidance was soon sold in the form of paid online courses on how to successfully trade in derivatives. And subscribers lapped them up.

Between 2020 and 2022, the study material and other financial content offered by finfluencers sold like hot cakes. It was a hugely successful venture, as measured by the large number of new demat accounts opened by retail investors during this period. A report by the Securities and Exchange Board of India (Sebi) states that the number of individual traders in F&O segment soared by about 540% from FY19 to FY22.

After two years of euphoria, the market finally took notice of the fabricated profit and loss (P&L) screenshots and deceptive practices of finfluencers. By this time, retail investors were wary of those who proferred investment advice. And this affected genuine advisers. Sensing the urgent need for transparency and accountability, Sensibull, a leading trading platform, introduced a solution–verified P&L. It is now a popular hashtag on social media: #VerifiedP&Ls. This revolutionary initiative aimed to expose impostors and restore faith in the trading community.

By November 2022, verified P&Ls became a norm in the traders community, benefitting genuine advisers and unmasking impostors. This also helped regain the trust of retail investors.

Recognizing the significance of transparent P&L reporting, some prominent brokerage firms, such as Fyers and Zerodha, followed Sensibull’s lead and introduced their own verified P&L products.

How verified P&Ls work

Verified P&Ls is a collaborative effort between brokers like Zerodha, and third-party platforms like Sensibull. Investors who are trading in the F&O segment can access their P&L statements directly in their broker’s backend, under the ‘my account’ section. On Sensibull, they need to connect their broking account and provide access.

Once logged in, investors can select the ‘verified P&L’ option and choose the desired time period for their P&L statement. This includes the option for custom time frames. Sensibull leverages the broker’s backend API to fetch real-time market values of their trading positions, ensuring accuracy and up-to-date information.

Investors can further specify the trading segment they want to analyse, such as equity, F&O, currency, commodity, or mutual funds. This allows them to generate P&L reports tailored to their specific trading activities.

A notable distinction of verified P&Ls is that they showcase both realized and unrealized P&L, providing a comprehensive view of a trader’s performance. This sets them apart from some third-party apps that only display mark-to-market (MTM) values.

Privacy and customization options are also available. Investors can choose to hide individual trades and mask the total capital employed, which includes cash and collateral. These features offer control over the level of information shared publicly.

Once the P&L statement is generated and verified, brokers generate a link that investors can share on Twitter. By enabling the ‘share on Twitter’ toggle and clicking ‘publish’, investors can showcase their trading skills with verified P&Ls.

Though the concept of verified P&Ls has helped establish credibility of those advertise their trading performance on social media, there are loopholes that can skew the true picture.

Loopholes persist

Third-party platforms present certain challenges and drawbacks where it concerns the disclosure of trading performance. One notable issue is the optional disclosure of capital. For instance, an investor may post an MTM profit of ₹50 lakh in absolute terms but could be trading with a capital of ₹50 crore. Retail investors often focus on absolute profit without considering return on investment (ROI), leading them to join F&O training groups without fully understanding their profitability in relative terms.

Another concern arises with the transfer of holdings and gifting of stocks. In such cases, brokers cannot determine the average entry price, allowing them to manipulate prices and increase their returns and thus falsify actual performance figures.

Selective disclosure is another challenge, as platforms do not mandate a specific frequency of posting, resulting in inconsistency. Some investors tend to showcase only profitable trades, often in random time frames, which introduces survivorship bias and does not provide a complete picture of their trading performance.

Furthermore, corporate actions and the unrealized P&L of pledged securities can significantly impact the buying price and distort performance figures. Factors like buybacks, dividends, mergers, and demergers can influence prices for an extended period, and the P&L of pledged securities can be manipulated until they are unpledged.

Carry forward P&L also poses an issue. Investors may post a high MTM profit on one day, but if they carry forward the same positions to the next day, it can create an illusion of consistent profits. Masking of positions can help alleviate this problem.

A significant limitation of brokers is the lack of metrics like XIRR or CAGR to judge performance accurately. While brokers provide ledger information and realized/unrealized P&L, they do not incorporate metrics that consider factors like pay-ins, pay-outs, and the first-in, first-out (FIFO) method. Brokers often avoid showcasing a comprehensive performance metric as it could potentially impact their revenues.

Even with unique IDs linked to Twitter accounts, cross-trading can still occur. A group of traders may engage in buying and selling within each other’s accounts, trapping unsuspecting retail investors. This can be exemplified through activities like converting black money to white through illiquid options.

In short, these challenges associated with third-party platforms and brokers highlight the importance of understanding the limitations and potential manipulations in disclosing trading performance. It underscores the need for comprehensive metrics, consistent disclosure practices, and improved transparency to protect retail traders from falling prey to misleading information.

Updated: 30 Jun 2023, 12:40 AM IST