July 6, 2021, | AtoZ Markets – The Australian Securities and Investments Commission (ASIC) has warned investors of a rise in scams targeting them.
Speaking directly to an audience of young investors fresh to financial markets, the corporate regulator implored them to be aware of the dangers lurking online.
“We are seeing more pump and dump activity, sometimes called momentum trading, and we need to be really cognizant of that,” ASIC senior manager of retail complex products and investor protection, Somer Taylor told the MarketLit virtual conference on Friday.
The regulator defines “pump and dump” as a scam in which criminals artificially inflate the price of a stock by promoting fake news or positive depictions of a company in order to increase trading and profit by later selling the inflated shares.
“If there is a deliberate attempt to interfere with the fair operation of the market, then ASIC will want to look at that, investigate and potentially take action,” Ms Taylor said.
While “pump and dump” activity has long plagued the local sharemarket, Ms Taylor said it had risen during the pandemic as a wave of new participants entered the market. As many as 400,000 Australians are estimated to have placed their first trade since early 2020.
Social media had exacerbated the trend and presented a “challenge” for the regulator because of the fragmented nature of the medium and scale of information online, she added.
ASIC officials conceded in February their efforts to monitor social media trading chatter were hindered by privacy laws and sometimes impenetrable slang and lingo adopted by young investors.
That came amid the GameStop saga, in which mostly Millennial and Gen Z day traders pushed up the US electronics retailer’s share price to expose an institutional short-seller.
The so-called short squeeze attack was coordinated on social media website Reddit but lawyers and regulators have debated whether the incident technically qualified as a “pump and dump” scam.
Read also: Will There Be a GameStop-Inspired Mania in China’s Stock Market?
Ms Taylor said the regulator was concerned that many inexperienced investors could be exposed if a market downturn emerged.
“Equity markets can be very prone to volatility,” Ms Taylor said.
“We would be concerned some retail investors have over-extended themselves and have potentially bought shares at a high price and would see quite a significant drop in the value of those shares if we see a correction.”
Some investors had borrowed funds or engaged in leveraged products and would therefore face “magnified losses”, she warned.
RMIT University senior finance lecturer Angel Zhong told the conference her research had detected a 60% spike in retail trading activity during the pandemic.
Referencing the ancient Chinese saying that “those who know do not tell”, Dr Zhong warned investors to be wary of unlicensed and ill-informed social media commentators.
“Don’t just assume a large number of followers is good. Popularity doesn’t equal credibility,” Dr Zhong said.
“Always raise your eyebrows when a specific company or product is promoted.”
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