Clampdown on social media to manipulate share prices

Regulators are stepping in to help Egyptian securities investors deluged via social media with share tips and information that could be market manipulation. In the US and other global markets, a giant swarm of retail investors dished out cash to trade “meme stocks” (great explanation article on Investopaedia) in the first half of 2021, driving up selected share prices after tips on discussion threads on Reddit and posts on Twitter and Facebook.

In the US, meme stock trading activity is lower since June but on Wednesday (8 Dec) a US manager announced the launch of the Roundhill MEME exchange-traded fund (ticker MEME). This follows the MEME Index which “consists of 25 equal-weighted U.S.-listed equity securities that exhibit a combination of elevated social media activity and high short interest”.

Egypt’s Financial Regulatory Authority (FRA) announced on 5 December that it has approved a legislative proposal that includes prohibiting and criminalizing the publication on social media of recommendations and advice related to EGX-listed securities. The aim is to deter people who publish misleading recommendations and advice to manipulate small investors.

According to a report in Egypt Today, Mohamed Omran, FRA chairman, said that when the regulator monitors trading on securities listed on the Egyptian Exchange they find many pages on social networking sites. Many individuals provide statements, information, advice and recommendations about the listed securities intending to guide the investment decisions of individuals to achieve personal benefit to the issuers and harm small investors. Mr. Omran said some of these pages are operated by dealers in the EGX, and that the recommendations published on them affect the trends of the EGX and share trading.

Fines or prison for misleading posts

Recommendations that affect the decisions of many investors could cause movement and change in prices of the securities, which falls under the category of securities price manipulation. These violations are prohibited in accordance with the provisions of Article 321 of the Executive Regulations of Capital Market Law No. 95 of 1992.

The regulator’s proposal is to add a new article in Chapter Six (Penalties) in Capital Market Law No. 95 of 1992. This includes prohibiting and criminalizing the publication of recommendations and advice related to securities listed on the EGX on social media. The aim is to deter people who issue and publish recommendations. The proposal is to include fines or imprisonment for 3-10 years, or both, as penalties.

Activities to be penalized include publishing news related to the imminent change of the price of a security in order to affect its prices and dealing with it, and publishing false or misleading information about the market with the intention of moving the prices of orders and execution towards a certain direction. 

Mr. Omran stressed that only qualified persons who have obtained a licence from the Authority (per Article 258 of the Executive Regulations of the Capital Market Law No. 95 of 1992) can issue recommendations and advice to share investors regarding securities listed for trading on the EGX.

Are investors moving on?

Mr. Omran mentioned that the Board of Directors of the International Organization of Securities Commissions (IOSCO) has discussed manipulation through electronic platforms. He said the meeting put the spotlight on sharp price fluctuations of some small-value shares in the global financial markets during January 2021. The discussion also covered the evolving role of social media in securities exchanges and how social media and other unregulated electronic platforms could become means of disseminating misleading information about companies.

IOSCO Board workstream 8 covers retail investors, but its latest report is not yet out.

An 7 Dec article on Bloomberg gives more background on the rise and fall of meme stocks: “ So-called meme stocks exploded into the collective consciousness in early 2021, when scores of day traders orchestrated epic short squeezes in the likes of GameStop Inc. and AMC Entertainment Holdings Inc.”

“The speculative fervour has cooled since then, and a hawkish tilt from Federal Reserve Chief Jerome Powell earlier this month dragged down expensive and risky stocks. The Solactive Roundhill Meme Stock Index slumped 14% in the five days ending Friday. GameStop and AMC have both plunged more than 30% over the past two weeks.”


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