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Social media tips may amplify short term market movements

-ESMA

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Effects of such tips rarely last beyond a day -ESMA

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Social media not held accountable for information accuracy

By Huw Jones

LONDON, April 3 (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 ( 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 ( GME ) 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.