The European Securities and Markets Authority (ESMA) has raised concerns over the increasing retail trading activities based on the information gathered from social media forums.
The risk warning by the European regulator came after the so-called short squeeze of the heavily-shorted GameStop stocks caused by the retail traders, who coordinated their strategies on the subreddit r/WallStreetBets.
Though the equities market structure in the United States and Europe are different, ESMA is concerned that stock market mishap is not impossible in the continent.
However, the regulator’s primary concern is the investment advice received by the retail traders on social media. Indeed, the notorious sub-Reddit is only the tip of the iceberg. Unauthorized investment advisors are all over the internet, across all social media platforms.
“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,” the market regulator stated.
“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.”
Retail Traders Have to Understand Volatility Risks
The regulator highlighted that retail participation in the stock market is encouraged for the development of the Capital Markets Union, but then they need to understand the volatility risks.
“Retail investors face significant risks when investing in stocks characterized by very high price volatility,” ESMA warned. “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.”
The ESMA and the watchdogs of individual EU countries are now analyzing the markets and considering to bring further risk protection measures to avoid GameStop-like mishaps in Europe.