ESMA expresses concerns over social media driven share trading

The European Securities and Markets Authority (ESMA) has released a statement expressing concerns over the growing retail trading activities based on information from social media forums.

The European Union’s securities markets regulator highlighted the risks for retail investors related to trading decisions based on informal recommendations and sharing trading intentions through social networks and unregulated online platforms.

The EU watchdog’s warning follows the events of so-called “short squeeze” of the GameStop stocks caused by the retail traders, who coordinated through the subreddit r/WallStreetBets.

ESMA expresses concerns over social media driven share trading

ESMA’s statement is part of investor protection objective to safeguard retail investors, whose participation is key to the development of the Capital Markets Union.

ESMA stated:

ESMA urges retail investors to be careful when taking investment decisions based exclusively on information from social media and other unregulated online platforms, if they cannot verify the reliability and quality of that information. A key step for any investor before making an investment decision is to gather investment information from reliable sources, while keeping in mind one’s investment objectives, the benefits of diversification and the ability to bear losses.

ESMA pointed out that there were several recent events that saw certain US stocks experience high volatility because of information shared on social media. Market rules in the US differ from those in the European Union, however the regulator is concerned that similar circumstances may arise in Europe as well.

ESMA said:

Retail investors face significant risks when investing in stocks characterised by very high price volatility. Volatility could be increased by many factors including when stocks are subject to heavy short selling. Price trends can suddenly come to a halt and reverse, quickly exposing retail clients to heavy losses.

In its statement, ESMA highlighted the following issues:

  • Investors need to use reliable information for investment decisions;
  • Increased risk of investor loss due to price volatility; and
  • Risk of committing market abuse.

ESMA and the regulators of individual EU countries will continue with analysis on market events in order to avoid similar events in the future. They will consider adopting further actions so that investors and the market integrity are protected.

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