Combating Market Abuse: The Emerging Challenges and Solutions in the Age of Online Trading and Social Media

Compliance within the financial services industry has taken a new turn as online trading and the emergence of ‘finfluencers’ on social media platforms have magnified the risks of market manipulation. The shift in the landscape demands greater attention to the prevention, detection, and mitigation of market abuse.

RegTech company MyComplianceOffice (MCO) has released a new whitepaper that explores how the rise of online trading, social media and ‘finfluencers’ has changed financial services and increased the risk of market manipulation. It also offers insights on how firms can implement safeguards in place to prevent, detect and mitigate these risks.

Regulatory authorities globally are growing increasingly worried about market abuse and are directing their focus towards the manipulation of markets. They see the rise in retail investors, investment guidance provided on social media, and new technological advancements as emerging risks. The responsibility now lies on firms to implement robust safeguards against such abuse across their entire operations.

Market abuse can manifest in various forms such as insider dealing, market manipulation, or disseminating false information. Despite different terminologies like securities fraud, insider trading, or market misconduct, the underlying concern remains the same. Market abuse greatly undermines the integrity of financial markets, making it a significant concern in today’s digitally-driven environment.

The growth in retail trading, catalysed by online platforms and social media, has significantly reshaped the financial services industry. A report from Schwab indicated that 15% of current retail investors began in 2020 during the pandemic. According to NASDAQ, these investors are motivated by lower market prices and attractive returns but are also susceptible to media influences. A survey by the U.K. Financial Conduct Authority (FCA) further revealed that 58% of participants were swayed by social media and others’ opinions in making investment decisions.

The mix of inexperience and rapid, anonymous online trading platforms amplifies the risks of market abuse. With minimal barriers to entry, investors can make speculative investments without adequate knowledge or understanding of what they’re investing in.

The research conducted by the FCA with BritainThinks showed alarming trends. Too many consumers are engaging in high-risk products that are misaligned with their risk tolerance and unlikely to meet their needs. Despite economic downturns, retail investors continue to invest heavily in the markets, reflecting a significant risk for inexperienced investors.

For insights into how the digital world has transformed the fight against  risk of market manipulation, download the free whitepaper here.

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