The members of the European Parliament’s Committee on Economic and Monetary Affairs (ECON) reviewed, on Tuesday 23 February, with the European Securities and Markets Authority (ESMA) and the European Commission, the lessons to be learned from the ‘GameStop’ saga, which sent Wall Street into a frenzy.
At the end of January, a group of individual investors, organised on the Reddit forum, invested heavily in the American video game company ‘GameStop’ in order to counter the large hedge funds, which had bet on its collapse, thus disrupting the financial markets.
MEPs are wondering: could such a situation occur on European markets? For the time being, there is little risk, ESMA and the Commission reply.
“The likelihood of similar events happening in the EU appears to be very limited. While some EU shares were mentioned in the press as potential targets after the ‘Gamestop’ related events, European short positions levels are lower than in the US, with only 20 issuers with net short positions above 10% and a maximum of 16%. This limits the risk of a ‘GameStop’ style ‘short squeeze’”, explained Steven Maijoor, ESMA President.
Furthermore, there was no increase in overall short selling activity in the EU in January 2021, he added.
Nevertheless, there are several lessons to be learned, according to Steven Maijoor. First, the growing phenomenon of “zero commission” brokers, such as the Robinhood platform that was used in the ‘GameStop’ case, should, in his view, be examined in more detail. This is also the case for other practices, such as the “gamification” of investment through the trading of shares on mobile applications that are meant to be fun and entertaining.
The ‘GameStop’ case also raises some questions about the EU regime on market abuse. “Posting false or misleading information about an issuer or a financial instrument on social media may also represent market manipulation”, he said.
In response to the concerns raised by this case, ESMA issued a statement last week calling on retail investors to exercise caution when making investment decisions based exclusively on information from social media or other unregulated platforms if the reliability and quality of such information cannot be verified.
For its part, the European Commission has also promised to follow this case closely and to assess whether further measures at EU level would be necessary to avoid such a situation.
In the first quarter of 2022, the Commission will present a strategy on retail investment that will take into account, among other things, the impact of new technologies and digital platforms on consumer behaviour, said Ugo Bassi, who works in the European Commission’s Directorate General for Financial Services.
“This new strategy will need to take stock of the lessons learned from the ‘GameStop’ case that might damage investors trust and confidence in financial markets”, he assured MEPs.
The European official also felt that financial education was a particularly important tool to guard against such risks. In this respect, the Commission is currently assessing the feasibility of a European framework for financial competence, he said. (Original version in French by Marion Fontana)