Market Abuse and Investment Recommendations in the Age of Retail Investing Boom
For a decade now, interest rates have been low, forcing investors to seek returns specifically from the stock market. In the same time, the number of retail investors has increased significantly. This means that investing is made easier as trading platforms and information about investing and investments are more accessible to people than ever before.
To better understand if and how this affects the investment market, we break it down into four essential remarks.
Retail investors shaping the market
The role of social media has increased as vast amounts of retail investors follow and participate in discussions and share their thoughts on investing on social media. As the recent WallStreetBets phenomenon and subsequent volatility of GameStop, AMC and Nokia shares in the US have shown, strong market reactions may root from discourses in social media. In Finland, Kauppalehti reported Danske Bank’s weekly statistics for the beginning of the year, which showed that the bank’s Finnish customers’ trading volume in a small foreign company’s shares had developed almost hand in hand with how much retail investors had discussed the share online.
Active trading by a large amount of retail investors may secure, at least temporarily, the price of a financial instrument in a level that does not necessarily reflect expected future cash flows from the financial instrument. Such price reactions are not, however, unheard of. For example, certain hedge funds and activist investors have previously caused significant stock price movements with their actions.
Market conduct rules apply to everyone
For active retail investors, it is vital to recognise that they are operating within the scope of the Market Abuse Regulation (MAR). Trading strategies that are likely to give misleading signals as to the supply, demand or price of a financial instrument, or are likely to secure the price at an abnormal or artificial level, may be deemed as prohibited market manipulation under the MAR.
This may include disseminating false or misleading information online, including social media, about a listed company or a financial instrument. For example, in certain circumstances coordinated and wide-spread strategies to buy or sell financial instruments may be deemed as market manipulation. Furthermore, every individual is prohibited from trading a financial instrument if the investor knows or ought to know that he or she possess inside information concerning the financial instrument.
“This is not an investment recommendation but my personal opinion”
Traditionally mainly large financial institutions, such as banks and investment firms, have produced investment recommendations to market participants. However, nowadays there are more and more private individuals who produce or disseminate information on social media about investing. If such information is regarded as an investment recommendation, it will fall under the MAR’s scope.
The MAR stipulates that people who produce or disseminate investment recommendations or other information recommending or suggesting an investment strategy must take reasonable care to ensure that such information is objectively presented, and that they disclose their interests or indicate any conflicts of interest. A private individual who distributes direct investment recommendations e.g. on social media may become subject to the MAR’s requirements and obligations if the person is considered as an “expert” under the MAR.
To be considered as an expert, the person must repeatedly propose particular investment decisions in respect of financial instruments and to present themselves as having financial expertise or experience. Furthermore, such person should have relevant number of followers and their recommendations be such that would be at least partially relayed by third parties, such as media. Still, who is to be considered as an expert must be evaluated on a case-by-case basis.
The European Securities and Markets Authority (ESMA) has raised concerns, e.g. over the gamification of investing, and warned against making investment decisions solely on the basis of information online if the reliability and quality of that information cannot be verified. In Finland, the Finnish Financial Supervisory Authority has previously ordered some bloggers to amend their posts online.
Traditionally, financial markets regulation has in large part targeted financial services providers. However, now the legislator and supervisors must consider how they can regulate and supervise the actions of vast group of retail investors who have traditionally been mainly seen as persons to be protected by the legislation.
Question might also arise whether platforms used by retail investors to trade and discuss on their investments should be more carefully regulated. Often when financial markets face turbulence, additional regulation is demanded. The European legal framework already contains previously described tools but the challenge may be how to effectively supervise the actions of the ever-growing number of retail investors. In the meanwhile the social media discussion around investing continues active and it remains to be seen what kind of long-time effects this may have on the market.