(For German version click here)
Last week users of the online platform Reddit caused a stir when they coordinated themselves in a subreddit to buy shares of the struggling videogames retailer Gamestop. As a result, the price of the share increased massively and booked gains in the four-digit range. The objective of this campaign by the internet trolls was to attack hedge funds that had previously shorted the share to an extend that even surpassed the number of existing Gamestop shares. The massively increased price of the share resulted in severe financial distress for the involved hedge funds. Following this success, retail investors also coordinated to invest in the crypto market, specifically in Dogecoin. As a result, the cryptocurrency’s price showed a temporal increase of 400 % and more. The coordinated operations of the Reddit users have impressively shown the power of the huge numbers within different markets. But are these actions compatible with the applicable market abuse regulations?
EU Market Abuse Regulation Only Applicable to Financial Instruments Pursuant to MiFID II
Within the European Union, the monitoring of market abuse is regulated uniformly by the Market Abuse Regulation (MAR). The regulation is directly applicable to all market participants without the need of a transposition into the national law of member states. However, the MAR is not applicable to all tradable objects. The prohibitions of the MAR for insider trading, for the publication of insider information and for actions, which are considered market manipulation require the tradable object to be a financial instrument pursuant to MiFID II. Tradable shares like those of Gamestop are tradable securities and therefore financial instruments in the required sense. With Dogecoin, the case is different. Cryptocurrencies are not regulated as financial instruments in MiFID II. The MAR may therefore be applicable to manipulative actions with regards to Gamestop shares, but not with regards to Dogecoin and comparable cryptocurrencies.
Market Manipulation in Most Cases Requires Misleading or Deception
The call for buying Gamestop shares in internet forums does not necessarily constitute an illegal market manipulation. Most of the actions that are prohibited by the regulations of the MAR require that the action constitutes a form of deception or misleading of investors or that the action can be considered as a form of disseminating false or misleading signals. The mere consent of retail investors with each other to collectively buy Gamestop shares cannot be qualified as either of the aforementioned. The evaluation of the case may differ, if the initiator of the whole affair had bought Gamestop shares prior to his statements in the internet forums and would therefore personally profit from the increased price of the shares. The initiator in this case would have had to disclose such a conflict of interest in a suitable manner prior to making the statement.
Attorney Lutz Auffenberg, LL.M. (London)
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