Posted by Michael McKee and Chris Whittaker on 18 February 2021
Tagged to ESMA, EU, FCA, Market Integrity

On 17 February 2021, the European Securities and Markets Authority (ESMA) published a statement to highlight to retail investors the risks connected to trading decisions exclusively based on the exchange of views, informal recommendations and sharing of trading intentions through social networks and unregulated online platforms.

High Volatility in the Trading of Certain Stocks

In the statement, ESMA referenced the high volatility in certain US-listed stocks connected to significant short positions and the concerted efforts by some retail investors to purchase these stocks. Social media was used by some of these retail investors in communicating their trading strategies and in making recommendations to other retail investors.

ESMA does not name particular stocks in the statement but it is highly likely that ESMA is referring to trading in the US-listed shares of GameStop (and others) which have been subject to considerable trading volatility in January/February 2021. This particular trading has largely been reported to have been coordinated via a Reddit forum called r/WallStreetBets, where amateur retail investors highlight their trading strategies and urge coordinated action against institutional investors who may have short positions in certain companies which they must cover.

According to ESMA, although market rules and structures are different in the European Union, “it cannot be ruled out that similar circumstances may occur in the EU as well”.

ESMA’s Message to Retail Investors

Whilst increased retail investors participation is a welcome development in the Capital Markets Union, ESMA cautions these 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.

In the statement, ESMA reminds retail investors of the importance of gathering information from reliable sources, setting and working towards investment objectives and the benefits of diversification.

ESMA also reminded investors that the use of leverage amplifies risks in the context of significant price volatility. ESMA stresses that trading with leverage is complex and should be entered into with a full understanding of the risks.

Market Abuse

The US trading has raised concerns about the employment of the market manipulation technique of a “short squeeze”.

In the statement, ESMA notes that discussing the opportunity to buy or sell shares does not constitute market abuse. Conversely, organising coordinated strategies to trade or place orders at certain conditions and times to move a share’s price may constitute market manipulation. Retail investors therefore should take special care when disseminating investment recommendations through any media, including social media.

ESMA and EU national competent authorities will continue to analyse market events and may consider further initiatives to preserve investor protection and market integrity going forward.

UK Financial Conduct Authority Statement

The ESMA statement follows a statement from the UK Financial Conduct Authority (FCA) on 29 January 2021. This FCA statement reminds investors that buying shares in volatile markets is risky and that investors may quickly lose money.

The FCA statement also notes that broking firms are not obliged to offer trading facilities to clients. They may withdraw their services, in line with customer terms and conditions if, for instance, they consider it necessary or prudent to do so. Firms are exposed to greater risk and therefore more likely to need to take such action during periods of abnormally high transaction volumes and price volatility.

This FCA statement on broker autonomy may be seen as in response to the reaction of the US broking firm, Robinhood, banning certain investors from the use of its broking services in connection with the trading of the shares of GameStop and other US-listed shares.

The FCA statement concludes that the FCA will take appropriate action wherever the FCA finds evidence of firms or individuals causing harm to consumers or markets.

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