Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), today commented on the recent volatility spike in the stock market.

Mr Maijoor voiced his concerns that specific aspects of online brokers’ business models may incentivise the adoption of risky short-term trading strategies by retail investors. He noted the growing popularity of providers like Robinhood over the last 12 months, with the pandemic appearing to act as a catalyst for this increase in retail trading, against a backdrop of further digitalisation and falling trading commissions in finance.

The phenomenon of zero-commission trading needs to be looked at in more detail, he said, adding that payments for order flow from third parties such as market makers may substitute commissions that are otherwise paid by clients, creating conflicts of interest and resulting in less transparency for retail clients.

“In my view, the practice of payment for order flow needs to be carefully assessed against the MiFID II requirements on conflicts of interest, best execution and inducements”, Mr Maijoor said.

Next to zero-commission trading, he noted the use of investment apps combined with a phenomenon known as the gamification of investing, potentially impacting retail investors’ risk awareness and contributing to the popularity of leveraged trading strategies.

Furthermore, from a market integrity perspective, the GameStop situation posed certain questions regarding the applicable market abuse regime requirements and prohibitions.

ESMA’s Chair explained:

“I would like to underline that any trading strategy likely to give misleading signals as to the supply, demand or price of a financial instrument, or likely to secure its price at an abnormal or artificial level may represent market manipulation. While a simple intention to buy the shares of an issuer on which large short sale positions are established does not constitute market abuse, coordinated strategies to buy and sell at certain conditions and at a certain point in time with the objective to inflate the share’s price could constitute market manipulation.

Moreover, posting false or misleading information about an issuer or a financial instrument on social media may also represent market manipulation”.

Another set of considerations and lessons learnt relates to the suspension of buy orders on certain platforms. The sudden exclusion of retail investors from trading GameStop shares via Robinhood was argued, by the platform, as being driven by the large margin calls issued by the clearing house to cover the new positions and related risks, reflecting the heightened volatility and concentration associated with this sudden large trading activity by Robinhood clients.

“In the EU, from our discussion with the supervisors of EU CCPs, no major changes in margin requirements were noticed as the EU stocks that followed a similar situation did not experience as much volatility and concentration as in the US case”, he said.

Mr Maijoor’s comments were made several days after ESMA issued a statement regarding trading driven by exchanges of views via social media. The regulator advised 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.