ESMA Concerns over GameStop-like 'Short Squeeze' in Europe

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 ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term 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 Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term 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.