The recent cases of extreme volatility of certain stocks trading prices in other jurisdictions' markets – which have linked to a significant accumulation of net short positions and concerted action by some retail investors, based on information shared on social media (see, for example, the so-called "Gamestop case") – prompted Consob to publish, on 12 April 2021, a statement "on cases of exceptional volatility in the trading of stocks and the use of social forums and web trading platforms" (the "Statement").
On this point, Consob considered that the so-called "Gamestop case" brought to the light the issue of the reliability of the social networks and online platforms as sources of information for investment purposes. Specifically, the potential classification of some information spread by social media as "investment recommendations" could raise issues in relation to the enforcement of possible violations of the rules set to tackle market abuses in Europe (see Regulation (EU) no. 596/2014). Therefore, Consob believes that retail investors should be aware of the risk of taking trading decisions based on this kind of information, if not adequately presented.
Such new forms of "social-herding investing" also often entails, like any other type of trading services on the web, the transmission to the customers (via e-mail, text messages and social media) of "trading signals" offered by third parties that grant access to the data on their trading operations allowing other traders to copy them on their own trading accounts. Therefore, in the Statement, it is pointed out that the described operating models have the potential to complement and emphasize any distortive effects of potential market manipulations carried out through the dissemination of information on social media and forums.
In light of the above, Consob has stated that, during the forthcoming review of the so-called "MiFID/MiFIR" and "MAR" regulations, Consob will pay particular attention to the assessment of the current regimes and their effectiveness in protecting retail investors, in relation to the aforementioned cases and the related technological advances (1).
Finally, Consob has requested to the regulators to be always ready and proactive to face new challenges and threats for investors, particularly retail ones. Financial markets are grounded on risk and uncertainty and, today more than ever, connected with digitalisation and social media tools, which contribute to speed up and interweave market dynamics. As a result, some developments are neither easily predictable nor manageable at once. Consob restate, therefore, that public authorities should always look at their ultimate mission, which is to restore and maintain confidence in financial markets.
(1) To name a few, the compatibility between the so called "payment for order flow" ("PFOF") – which is the compensation that financial intermediaries receive for routing trades for trade execution – and the EU discipline of best execution/inducements needs to be assessed, in particular whether PFOF might be enhancing the quality of the service provided to customers.
Authors: Luca Lo Pò and Claudio Saba