Aquis Exchange warns of high volatility in UK ahead of ‘meme stock’ scenario

Aquis Exchange has warned of very high volatility in the trading of certain US stocks “linked to a significant accumulation of net short positions and concerted action by some retail investors, based on information shared on social media”.

The warning comes nearly one month after the ‘meme stock’ trading frenzy jumpstarted by the r/WallStreetBets subreddit. The exchange operator based in the United Kingdom is addressing the issue ahead of what might happen in the future as ‘meme stock’ trading grows in adoption.

“Although market rules and structures are different in the UK, it is possible that similar circumstances could also occur in UK markets – and we are starting to note increased volatility in certain sectors”, said the operator. “AQSE urges 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.”

Aquis Exchange recommends retail investors to first gather investment information from reliable sources while keeping in mind one’s investment objectives, the benefits of diversification, and the ability to bear losses.

As price volatility increases investors’ risk of loss, retail investors up their risk when taking positions in stocks characterized by very high price volatility. Stocks under heavy short selling are particularly prone to volatility and price trends can suddenly come to a halt and reverse, quickly exposing retail clients to heavy losses.

“Discussing the opportunity to buy or sell the shares of an issuer does not constitute market abuse. However, organizing or executing coordinated strategies to trade or place orders at certain conditions and times to move a share’s price could constitute market manipulation”, said the statement.

“Similarly, special care should be taken when posting information on social media about an issuer or a financial instrument, as disseminating false or misleading information may also be market manipulation. Additionally, care should be taken when disseminating investment recommendations through any media, including social media and online platforms, as they are subject to a number of regulatory requirements”, it concluded.

The announcement by Aquis Exchange is inspired by ESMA’s recent statement on ‘meme stocks’. The regulator said coordinated strategies may constitute market manipulation: “Organizing or executing coordinated strategies to trade or place orders at certain conditions and times to move a share’s price could constitute market manipulation.”

‘Meme stock’ trading, the phenomenon of late January 2021, seems to be just starting. After the Gamestop short squeeze, r/WallStreetBets took to the AMC stock and a few other instruments, including Silver, to replicate what was deemed as a success. Most recently, the social media trading frenzy aimed at the whole Cannabis sector.

Apart from retail investors who were “caught holding the bag” in such rollercoaster markets, many within the industry got hurt by the meme trading craze. Various retail brokers serving their customers were unprepared to deal with this kind of volatility.

In the United States, talk about banning Payment for Order Flow (PFOF) has reemerged as neo brokers, namely Robinhood, not only failed to maintain the required trading conditions for their customers but have also shown the conflict of interest behind their business model.

Robinhood CEO Vlad Tenev has recently decided to go on a crusade against the two-day trade settlement period. The problem is not the Payment for Order Flow model, according to Mr. Tenev. Instead, the problem is when clearinghouses skyrocket deposit requirements overnight during times of extreme volatility.