Economic and Monetary Affairs MEPs discussed whether EU financial markets rules can protect retail investors from gamification of investing and the increased role of social media.
During the GameStop trading frenzy, retail investors boosted the price of a company’s shares using online trading platforms. This caused losses for the hedge funds that were betting against this stock, but also fuelled the price volatility that affected the very retail investors who got involved in the first place.
Discussing the recent events with the Chair of the European Securities and Markets Authority
(ESMA), Steven Maijoor, and Mr Ugo Bassi from the European Commission, MEPs stressed that retail investors cannot be pushed out of the financial markets but must be properly protected from unregulated online trading platforms and rumours being spread on social media through a robust legal framework and financial literacy efforts.
MEPs enquired whether the EU’s rules on market abuse and capital markets are fit for purpose against trading apps, which do not charge any fees but operate through a “payment for order flow model”. Such a model might create a conflict of interest with a client and is prone to price volatility. Finally, they wanted to understand whether using social media to guide retail investors towards certain stock might constitute a coordinated manipulative action and hence market abuse.
Mr Maijoor from ESMA stressed that the outcome of the Game Stop event should not lead to retail investors being excluded from the capital markets. However, he stressed the dangers of gamification of investing and how impaired risk awareness could be to the detriment of retail clients, who might eventually lose faith in financial markets. He assured MEPs that the ESMA would look into zero commission trading and conflicts of interest. Additionally, they will reflect on improvements that could be made to the short selling regime, possibly including better and more information on short positions and lower reporting thresholds.
Mr Ugo Bassi, the European Commission’s Director for Financial Markets, said that they are currently working on a new retail investment strategy, planned for the first half of 2022. This strategy will take account of all new technologies, digital platforms and new consumer behaviour induced by social media. It aims at making retail investment in capital markets as safe as possible with the help of financial education, which in the medium to long-term should give a chance to retail investors to improve personal finances.