AFM Market Watch 3 - Investing and Social Media

AFM Market Watch 3 - Investing and Social Media From the editorial team

Dear reader, we are pleased to present the third edition of our newsletter, the AFM Market Watch. This newsletter covers capital market-related topics such as MAR, MiFID II, and transaction reporting.

The newsletter always consists of two parts: (i) a main article on a current capital market-related topic, supported by (data) analyses; and (ii) a short 'facts and figures' section that tracks market developments. The AFM Market Watch is published regularly and sent to subscribers (click here to subscribe).

In this edition, the topic 'Investing and social media in the context of GameStop' is discussed (pp.1-5), followed by the facts and figures section (p.6).

Introduction Access to information about investing is becoming increasingly low-threshold: influencers share their views on stocks and crypto with their followers via social media, and there are countless podcasts about investing. Followers adopt these views and act on them, but not always with due caution. Just look at the hype surrounding the GameStop stock earlier this year.

Interest rates on savings have been historically low for a long time, and the COVID-19 lockdown has restricted our freedom of movement. Distraction and excitement are easy to find: with a few presses on your smartphone, you buy or sell stocks or crypto via an app. It is almost like a virtual game. And such an investment decision is made faster if a well-known person tips you off via their social media channel.

AFM Market Watch Newsletter on MAR, MiFID II and transaction reporting June 2021, Edition 3

AFM Market Watch - June 2021, Edition 3 2

But giving investment tips: can you just do that? There is freedom of expression, but with conditions. What responsibilities and obligations do influencers have when making investment recommendations? And what is your own responsibility as an investor? What considerations must you make?

In this Market Watch, the AFM addresses the risks of investment decisions made through influence via social media and which questions you should ask yourself before deciding to invest. We also discuss the rules for investment recommendations and for the dissemination of information that messages, including on social media, must comply with.

1. GameStop and the power of social media Earlier this year, there was sudden and global attention from investors for the American stock GameStop. A real run on the stock emerged, spurred by messages on social media and investor forums. Investors massed on GameStop shares, and the price exploded. Only to fall significantly afterwards.

Investors in the Netherlands also traded this stock: some 30,000, while none of them had invested in GameStop before the hype.

GameStop shares are listed on the Nasdaq in the US. The price of the GameStop stock moved strongly from January to mid-March 2021. The price varied between $17.25 and $347.51 (closing prices) with an intraday high of no less than $483.

The AFM has analyzed the trading of GameStop shares by Dutch retail investors in the period from January 18 to March 18, 2021.

This analysis revealed that: • 29,394 individual Dutch retail investors traded GameStop shares during this period. • These investors had not previously traded GameStop shares. • At some Dutch brokers, the GameStop share was the most traded share in February and March 2021.

The distribution by age of Dutch GameStop investors shows the following distribution: • Mainly 'younger' investors traded in GameStop shares. • The average age was 31 years. • The most common age was 26 years. There were 1,698 investors.

The distribution of the prices at which these investors bought GameStop shares shows the following: • 20% of investors bought at or below a price of $101 per share. • 80% of investors bought at or below a price of $279 per share.

The average purchase price within this group of investors was $189 per share.

[Figure 1] [Figure 2] [Figure 3]

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The distribution of the total value of GameStop shares purchased per retail investor shows the following: • 20% of investors bought for a total value of $295 or less. • 50% of investors bought for a total value of $916 or less (median = $916). • 80% of investors bought for a total value of $4,270 or less.

The average total purchased value within this group of investors was $11,532. At least 40 investors bought for a total value of more than $1 million1.

Furthermore, the GameStop case shows that investors can be influenced to make an investment seemingly without taking into account the objective and/or fundamental grounds on which an investment decision is normally based.

Supervisors are investigating the latest trends in investing. For example, recent research by the British Financial Conduct Authority (FCA) shows that younger investors are particularly involved in higher-risk investments. And that this is partly due to the influence of social media and new low-threshold investment apps. There are also indications that higher-risk investments are not always suitable for these investors, as 59% state that a significant loss on those investments would have a fundamental impact on their current or future lifestyle.

The research further shows that for many of these younger investors, emotions and feelings (the excitement of investing) and social factors are the main reasons for their investment decisions. This applies especially to those who invest in more risky products. For them, challenge, competition, and novelty are more important than conventional, more functional reasons for investing (such as achieving better returns or building extra wealth). Of those surveyed, 38% did not even mention any functional reason for their top-3 largest investments.

In light of this research, the FCA states that it is concerned that some investors may be tempted to make risky investments that are likely not suitable for them. This group of investors is very dependent on social media for tips and news. And according to the FCA, this is partly driven by the possibilities of quick access to a wide range of investments that new investment apps offer.

The findings of the FCA are in line with the findings that the AFM recently published in the Consumer Monitor Investing. This shows that especially more young people have started investing in their search for higher returns. They see themselves as above-average good investors and have a higher risk appetite. These starters often invest independently, where the rise and ease of investment apps seem to play a role. Investors who invest via an app execute more transactions.

The European Securities and Markets Authority (ESMA) also pays considerable attention to investing and social media. As a member of ESMA, the AFM contributed to ESMA's statement on the events surrounding GameStop. The AFM and some other supervisors such as the French Autorité des marchés financiers (AMF) have also published on this themselves. In these publications (see the AMF publication and see the AFM publication), investors are warned, among other things, about the dynamics on social media that can lead to exceptional price movements of shares and the risks associated with them. As a result of the GameStop hype, the US Securities and Exchange Commission (SEC) has increased its efforts to monitor the market for unusual activities spurred by social media dynamics. In that context, the SEC has suspended trading in the shares of various companies in response to market volatility caused by "apparent attempts on social media to artificially inflate the share price."

1 An investor who bought (and possibly sold) GameStop shares multiple times (in the period from January 18 to March 18, 2021) can reach this figure of the total purchased value. For example, if an investor bought $10,000 worth of GameStop shares 100 times (and sold them), they bought for a total value of $1 million in that period.

[Figure 4]

AFM Market Watch - June 2021, Edition 3 4

The AFM has recently started a broad exploration to address the working methods and impact of (financial) influencers.

2. Investing; what questions should I ask myself beforehand? Investing can be helpful in achieving personal goals. For example, when building up a pension or a savings pot for your children's education. But investing also comes with risks. The AFM has a practical checklist on investing on its website. This checklist contains a number of points of attention in the form of questions that are important to answer before making an investment decision. Those questions are:

3. What is my goal for investing?

4. How long can I do without my money (investment horizon)?

5. How much risk do I want to take? How bad is it if I lose my invested money?

6. Have I checked whether the company is supervised by the AFM?

7. What costs does investing involve?

8. Do I understand what I am investing in?

9. Have I informed myself well?

10. Am I diversifying my risks?

You can find the checklist with more explanation of the questions here.

3. Investment tips; what does the law say? If a message is on social media, it has the potential to reach a large audience. Especially if that message comes from a well-known person (influencer) or if that message is on a popular forum. Such messages can cause people to be moved to make certain (investment) decisions.

Freedom of expression is a great good, and that freedom applies just as much to expressions on social media. But if a message contains a so-called 'investment recommendation', that message must comply with certain legal requirements. And those requirements also apply if it is a message on social media.

The Market Abuse Regulation (MAR) and subordinate legislation specify when there is an investment recommendation and/or strategy and what rules apply to them. In short, an investment recommendation is a public promotion of an investment strategy regarding one or more financial instruments (such as shares, derivatives, bonds) including an opinion on price development.

The AFM has published a brochure providing detailed explanation of the regulations regarding investment recommendations. The regulations essentially state that everyone who provides or disseminates investment recommendations, or other information in which an investment strategy is recommended or proposed, ensures that such information is presented objectively and that they disclose their interests or conflicts of interest regarding the financial instruments to which that information relates. From the information that must be provided based on these (transparency) requirements, it can be determined, for example, what the status or credibility of an investment recommendation is, what interests the issuer of the investment recommendation has, and to what extent the investment recommendation is presented objectively. An investor can thus determine for themselves how much value they want to attach to the investment recommendation.

This brochure is useful for everyone who disseminates or issues investment recommendations.

4. Information manipulation The dissemination of incorrect or misleading information about financial instruments is harmful to investors. It is also harmful to the listed institution concerned, because information manipulation undermines the reliability of information available in the market about that institution.

Therefore, it is not allowed to disseminate information (including rumors), of which the disseminator knows or ought to know that the information is incorrect or misleading.

The AFM actively monitors media, including internet chatrooms, forums, and social media, for incorrect or misleading information about financial instruments. In doing so, the AFM uses data-driven models that monitor media messages, including those on social media.

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5. Enforcement The AFM is the supervisor of the financial markets in the Netherlands. If necessary, the AFM intervenes. Even reporting on social media is subject to regulation. The popularity or anonymity of a social media profile does not exempt one from the obligation to comply with regulations. If the rules are not followed, for example regarding investment recommendations or information manipulation, measures may follow. This is laid down in the AFM's enforcement policy.

Whether the AFM acts informally or formally, and which measure or combination of measures is taken, always depends on the circumstances of the violation and the weighting of the factors involved. In addition to the seriousness and duration of the violation, the AFM also weighs the degree of culpability.

The AFM can impose an administrative fine for violations of the rules. The AFM can impose a fine for information manipulation of up to €15 million (or 15% of annual turnover if that is more than €15 million). The base amount is €7.5 million. In the event of a violation of the rules regarding giving investment recommendations, the AFM can impose a fine of up to €1 million (base amount €500,000). When determining a fine, the AFM takes into account the offender's ability to pay.

The AFM can also file a criminal complaint. Then the violation is investigated further and prosecuted under criminal law.

6. Concluding remarks Influencing others to move them to make a certain investment decision is as old as time. The need for excitement and learning how investing works through trial and error also plays a role. It is important that you know what the rules and risks are when you venture onto the playing field of the financial markets.

Well-functioning and integrity financial markets are essential for companies and governments to attract capital and keep the economy running. The AFM supervises the behavior of players on the financial markets and monitors the robustness and integrity of those markets. So, making a risky investment or giving your opinion on a certain investment is fine, but be aware of the rules that apply and the risks that exist, and act accordingly.

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Facts & Figures Development of net short positions as reported to the AFM.

• Reported short positions in AEX shares have been relatively stable over the past year. • Short positions in AMX shares decreased by the end of 2020, mainly due to a sharp decline in the real estate sector (see Figure 6). • Notable is the fluctuation of average short positions in the real estate sector. In the second half of 2020, the sector was hit hard by the effects of the pandemic. • The average of short positions in the Banking sector is limited compared to other sectors. • Since the beginning of the pandemic, average short positions in financial services have decreased strongly, while short positions in the technology sector have doubled.

[Figure 5] [Figure 6]

0% 1% 2% 3% 4% 5% 6% 02-03-2020 02-06-2020 02-09-2020 02-12-2020 02-03-2021 0 100 200 300 400 500 600 700 800 AEX index (close) Average net short position AEX shares Average net short position AMX shares

0 2 4 6 8 10 12 14 mrt apr mei jun jul aug sep okt nov dec jan feb mrt apr mei Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 2020 2021 Average sector Technology Average Travel and Leisure Average Financial Services Average Banks Average Real Estate

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Mission statement: The AFM is committed to promoting fair and transparent financial markets. As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands. The text of this publication has been compiled with care and is informative in nature. No rights may be derived from it. Changes to national and international legislation and regulation may mean that the text is no longer fully up to date when you read it. The Dutch Authority for the Financial Markets is not liable for any consequences - such as losses incurred or lost profits - of any actions taken in connection with this text. If you are not on our email list yet, please subscribe on our website to receive future editions: www.afm.nl/afmmarketwatch © Copyright AFM 2021