Australia’s financial regulator has warned retail stock-pickers to be extra careful about where they invest their money as the social media-driven market frenzy for GameStop shares spills into other markets such as silver amid wild volatility in values.
With the lure of huge profits from punts in the US retail chain depicted as a chance to beat financial giants at their own game, prices in some Australian-traded stocks such as the shopping mall operator Unibail-Rodamco-Westfield have spiked in recent days.
URW, which has its main stock market listing in New York, had seen a 20% rise in recent days as small investors rushed to buy its shares in the hope of squeezing Wall Street hedge funds that had been shorting the stock, or betting that the price would fall.
But URW was the biggest faller on the ASX on Tuesday with a drop of 7.43%, while silver, which was being spruiked by another orchestrated online campaign, fell 3% despite a rally to a months-long high on Monday.
The volatile conditions brought a warning from stock market professionals about the “seductive” attraction of such bets, and the Australian regulator said making a quick buck presented clear dangers.
The local stock market was “substantially different” and more tightly regulated than Wall Street, a spokesman for the Australian Securities and Investments Commission said, warning that consumers had to exercise caution at a time of “inexplicable price movements”.
“We always urge retail investors to take particular care, apply sensible rules of risk management and conduct thorough research prior to any investment decision,” the spokesman said. “While that advice applies at any stage in the investment cycle, it’s fair to say it would not go astray in some markets at the moment.”
Asic also promised to crack down on any illegal spruiking of shares by unlicensed operators, in contrast to the US where users on online forums such as Reddit have been free from regulation to mobilise mass investment in stocks such as GameStop.
The campaign saw the value of the company, a struggling retail chain targeted by hedge funds in the belief that its bricks and mortar model was doomed by the pandemic, skyrocket from a few dollars to more than $300 a share.
Few market professionals have made the case for such investment strategies, but they acknowledge that the impact of social media on the industry, while potentially risky for inexperienced investors, could also be longlasting.
Nick Morton, the chief investment officer of Resonant Asset Management in Sydney, said a lot of smaller investors wanted to make a life-changing trade which would be “like winning the lotto”.
“It’s very seductive where you have social media showing screenshots of charts showing how $50k has been turned into $50m,” he said. “But the people with big tickets are going to cash out. They’ll sell first and tell the world later. By that stage it’s too late for most people.”
But despite the dangers of small investors getting badly burned, he said that the “private armies” of investors that have been mobilised online had changed the way that financial markets operated.
“There is a broader social perspective about how digital platforms enable people to mobilise private armies – whether we’re talking about in relation to politics, targeting celebrities, or now in the case of financial markets. None of that would have been possible 20 years ago.”
The surge in the price of silver has seen an increase in demand for the metal, according to Western Australia’s official bullion mint, the Perth Mint, with retail investors leading the way.
Jordan Eliseo, the manager of listed products and investment research at the mint’s Gold Corporation in Sydney, said there was “no doubt” the rally had been driven by retail investors but he cautioned that existing players were likely to have used the phenomenon to add to their holdings.
The key difference in the silver market was that it was much bigger and more liquid than that of a single company such as URW or GameStop. The latter was worth only $1.5bn before the trading frenzy, whereas the global silver market is valued at $1.5tn with stakes held by a huge variety of institutions.
“That makes it a much harder market for any group of investors to move around, including retail investors,” he said.