Are financial markets threatened by social networks? A burning question that raises interest and concerns about the impact of virality and immediacy on market stability. Discover in this article why these platforms could pose a danger to global finance. Get ready to dive into a captivating and informative analysis!
A New Profile of Investors
The emergence of social networks in the financial world has led to the appearance of a new profile of investors. Since the Covid-19 crisis, a mega-trend has emerged: more than half of the “players/investors” who entered the markets during this period are under 35 years old. Surprisingly, nearly 90% of these young investors regularly engage in gambling, and 20% claim to be motivated by investment as a game.
According to an OECD study in 2023, a majority of these investors exclusively inform themselves via social networks to make their investment choices, including 41% of those under 24. This behavior demonstrates a misplaced blind trust, as 66% of them believe they are competent despite shortcomings revealed by the Financial Markets Authority (AMF).
The Impact of Social Networks on Markets
Social networks fundamentally change the allocation of resources in financial markets. Three main effects can be observed: a transformation of types of actors, the amplified impact of certain information, and an increased speed of news transmission.
The battle between small investors and large companies is becoming increasingly frequent. An emblematic example is the case of GameStop, supported by the financial influencer known as “roaring kitty.” This operation caused the stock to explode by 200% in two days following a simple social media post. These stocks are called meme stocks, speculated for the fun of ownership, fueled by the network effect.
The Dangers of the Attention Economy
In an uncertain world, every piece of new information is scrutinized closely, which can lead to increased volatility. Social networks, by providing masses of information, expose investors to the risks of information manipulation. This benefits fraudsters who manage to steer the market through fake news and speculative waves.
The AMF has warned investors about the vigilance needed towards financial influencers, who are often less qualified to provide relevant advice. This vigilance is crucial because, on social networks, information is disseminated at a speed and at a low cost, increasing the potential for large-scale market reactions.
Lessons from Failures and Impersonations
Recent lessons perfectly illustrate these risks. In 2016, billions of euros were traded following a fake news story stemming from an account impersonation. Although denied in less than ten minutes, this fake news caused an 18% drop in the stock price of the affected company.
Similarly, a mistake by a trader at Citigroup, amplified by the speed of market reactions, led the bank to a fine of £61.6 million in the UK. These examples show the potential negative impact of rapid and unverified information on the markets.
Social Networks: A Source of Information and Warnings
However, social networks remain a valuable source of information for institutional players, enhancing market predictability. The predictive approach based on data analysis represents a huge advancement, provided it is accompanied by solid safeguards.
To minimize risks, it is crucial to strengthen regulation and the authentication of information disseminated on these platforms. Investors must also develop a more critical approach to the information obtained from social networks.
