People organizing through Reddit drove up the price of shares in companies including retailer GameStop | Chris Delmas/AFP via Getty Images

The EU’s markets regulator has cautioned people to tread carefully when trading stocks based on information on social media in a rebuff for GameStop-related trading.

The European Securities and Markets Authority (ESMA) today warned armchair investors of the downsides of being caught up in the social media-driven trading frenzy that has gripped U.S. markets and created large price swings in some stocks.

“ESMA urges retail investors to be careful when taking investment decisions based exclusively on information from social media and other unregulated online platforms, if they cannot verify the reliability and quality of that information,” the Paris-based authority said in a statement.  

U.S. investors, organizing through the Reddit social media platform, drove up the price of shares in companies including retailer GameStop, aiming to squeeze out hedge funds’ bearish positions.

ESMA warned that price volatility increases the risk of large losses for everyday investors, while spreading any misleading information about a stock on social media could land users in hot water due to market manipulation rules.

“Discussing the opportunity to buy or sell the shares of an issuer does not constitute market abuse,” ESMA said. “However, organising or executing coordinated strategies to trade or place orders at certain conditions and times to move a share’s price could constitute market manipulation.”

More from ... Hannah Brenton