By Huw Jones
LONDON (Reuters) - Choosing stocks based on social media tips might generate big returns in the short term but not in the longer run, and the influence of such tips raises concerns over investor protection and keeping markets orderly, the EU's securities watchdog said on Wednesday.
The power of social media in hyping up trading was seen in January 2021, when "meme stock" GameStop (NYSE:GME) surged as much as 1,600% on Wall Street as amateur investors piled into the videogame retailer's shares.
EU finance ministers are keen to attract more retail investors to help deepen the bloc's capital market, but do not want market volatility such as that involved in speculative trading in GameStop to tarnish investing.
The European Securities and Markets Authority (ESMA) said in its first risk analysis on the impact of social media on markets that concerns remain and further analysis is needed.
"Our results show a significant correlation between social media interactions and stock excess returns at the very short term, suggesting that information spreading on social media platforms influences investor trading choices and may amplify short-term financial market movements," ESMA said.
"These effects, however, do not last longer than one day and show no subsequent relationship," raising concerns over investor protection and market orderliness.
Regulators have been taking a closer look at social media, with Britain warning "fin-influencers" last week on the need for authorisation before promoting financial products online, or risk criminal prosecution.
ESMA said it found no link between social media activity and excess returns in the longer term, making the former less convenient as a means to "predict and plan investment strategies."
At the beginning of 2023, there were 350 million social media users in EU, or 80% of the bloc's population.
In France, among investors with less than three years of financial experience, social media is the most commonly cited source of information for 18–24-year-olds, ESMA said.
"It is important to note that specialised financial media are held accountable for the accuracy of the information they report. This is not necessarily the case for social media," ESMA said.
ESMA holds an online hearing on April 26 into social media influence on financial markets and cryptoassets trading.