On 23 February, the European Securities and Markets Authority (ESMA) published its views on zero-commission stock trading and online brokers’ business models (please see this link).
In its publication, ESMA noted that specific aspects of online brokers’ business models might incentivise the adoption of risky short-term trading strategies by retail investors. ESMA also expressed concerns about the transparency of the fee structure and the role of online brokers’ business models in creating the recent surge in retail investor participation. In this respect, ESMA stressed that it will look into the business models and fee structures of new technologies with more detail, such as zero-commission trading apps, stating that there is “no such thing as free lunch”.
ESMA also noted that next to zero-commission trading, other practices also deserve scrutiny, such as the use of investment apps combined with the ‘gamification’ of investing. In the view of ESMA, this could affect retail investors’ risk awareness and contribute to the popularity of leveraged trading strategies.
ESMA expressed concerns on zero-commission stock trading and online brokers’ business models following equity price surges of certain firms in mid-January. The shares were promoted on internet forums and social media, which led to retail investors purchasing shares with leverage through zero-commission investment apps and forced purchases by short sellers, resulting in a ‘short squeeze’. ESMA emphasized that short position levels within the EU are lower than in the US, so risks of ‘short squeezes’ are less imminent.
ESMA’s concerns may affect online brokers providing services in the EU. ESMA will closely monitor developments and take further action if necessary.
