Open Markets, Open Flank: How Social Media and Retail Investing Expose Financial Markets to Geoeconomic Risk

In Brief

• Firms are already paying for early access to “influential” Truth Social posts. This shows social media is now priced as market-moving information, yet no major market has comprehensive rules for it.

• Retail investing went mainstream through mobile platforms and pandemic-era adoption. Social media became a main source of investment recommendations. The 2021 GameStop squeeze showed what happens when the two combine.

• Herd behaviour is amplified by algorithms and influential accounts. Prices can move sharply without any identifiable manipulator, which is a problem because market abuse law relies on proving intent. McAfee’s pump-and-dump was an easy case, while GameStop and Musk’s posts are the hard ones.

• Regulation has always lagged. The first US insider trading case came in 1961, almost three decades after the SEC was created, and other major markets took even longer. Research suggests that enforcement, not the mere existence of a law, is what lowers the cost of equity (by roughly 5%).

• Anonymous, cheap and easily coordinated accounts could let state or non-state actors spread fabricated rumours and trigger sell-offs. Research on bot activity and foreign-origin corporate misinformation shows the building blocks exist, though no confirmed state-led case has emerged.

• The biggest risk isn’t a single bad actor but speed and scale.

Key Takeaways for Investors

• Be sceptical of narrative-driven surges. Rallies in meme stocks and tokens often reflect collective attention rather than fundamentals, and the absence of a clear culprit doesn’t mean a move is informationally sound.

• Do not count on regulatory protection. Enforcement has historically trailed new market practices by decades, so losses are unlikely to be recoverable through prosecution in the near term.

• Monitor social media, but verify before acting. It is now part of the information environment, so ignoring it is not an option. A fabricated rumour can move prices before the truth is established, so check who is posting and why, especially for holdings in sensitive sectors such as banks or strategic industries.

Trump Media & Technology Group launched an early access platform to certain profiles on Truth Social. Since the July 2026 announcement, firms started paying for early access to what are considered, "influential" posts. Whether this will survive the ongoing judicial procedures remains to be seen. Regardless, the fact that there has been a willingness to pay money for this access is a testament to the importance social media has gained with respect to investing in financial markets.

Social media has, since its inception, gone from a simple tool of communication to an instrument so woven into people's daily lives that banning access can even be considered a violation of personal liberties.

In parallel, retail investing’s development was more rocky. Long confined to the wealthy and professional traders, discount brokers opened online access in the 1990s and a brief wave of amateur investors faded with the dot-com bubble burst. The real transformation began with mobile-first platforms: eToro and Robinhood. COVID-19 then drove the platforms into true mass adoption. As the European Securities and Markets Authority (ESMA) has noted, the pandemic accelerated retail investors' adoption of digital tools and apps for managing their finances and seeking investment recommendations – most notably on social media. This led to some of the first major events that demonstrated their interconnectedness: the January 2021 GameStop short squeeze, organized by Reddit's WallStreetBets and the John McAfee pump and dump. 

These cases are not only an illustration of collective mania, they expose a structural weakness. A financial market that is open to retail investors is vulnerable to anyone who knows how to move them. An army of social media users can shift the price of a stock or a currency without a single institutional actor involved. No mechanism truly regulates mania or a hostile foreign actor looking to destabilize a market from abroad as well as an obvious fraudster like McAfee. Assessing the scale of this vulnerability requires three lenses: a sociological reading of the herd behavior that makes retail investors susceptible in the first place, a view of the economic cost of regulatory lag, and a geoeconomic assessment of what this exposure means for national security and investors when markets can be manipulated so easily.

1. Sociology: the herd mentality

The exponential growth of retail investing was a technological, sociological, and financial phenomena. As financial markets became more accessible to millions of individuals, investment decisions have increasingly moved from the private relationship between an investor and a financial intermediary into a visible and collective environment.

Herd behaviour occurs when individuals follow the actions of a larger group, sometimes disregarding their own information or risk assessment. In financial markets, the desire for quick returns and the fear of missing out on an opportunity can be powerful incentives to follow the crowd. An investor sees an asset rising, observes thousands of other people discussing it, and interprets this collective enthusiasm as evidence that the opportunity must be real. The resulting demand increases the price, which in turn attracts more investors. Social media dramatically amplifies this mechanism. Traditional financial markets have always been influenced by information, sentiment and speculation, but information historically travelled through relatively limited channels: financial newspapers, analysts, brokers, television and professional networks. 

The phenomenon was particularly visible with the GameStop rally in January 2021. Through Reddit's WallStreetBets and other social-media channels, large numbers of retail investors converged around the same stock. The episode demonstrated that retail investors, when coordinated, could collectively produce extraordinary movements in the price of an asset and impose substantial losses on more traditional market participants. GameStop demonstrated that collective behaviour does not necessarily require a conventional institutional organiser. A movement can emerge organically from sufficient individuals responding to the same information or narratives. This distinction is crucial from a regulatory perspective. In a conventional pump-and-dump scheme, identifying manipulation can be comparatively straightforward. The case of John McAfee illustrates the traditional model: he earned more than $13 million by encouraging his Twitter followers to invest in cryptocurrency while concealing the fact that he had previously bought the assets himself, only to sell them once prices had been inflated. While the intention to manipulate is identifiable, the collective behaviour generated through social media can be much more ambiguous.

Elon Musk has also repeatedly demonstrated the capacity of social-media statements to affect the price and public perception of assets, particularly Tesla and cryptocurrencies such as Bitcoin and Dogecoin. His influence illustrates an important asymmetry between traditional financial (and institutionalised) communication and social media. A statement from a corporate executive or public figure can reach a vast audience without passing through the filters traditionally associated with financial journalism or investment research. Followers can react immediately, while algorithms amplify content that generates engagement. The resulting market effects occur within hours, long before investors have had the opportunity to independently assess the information.

The metaphor of the "shepherd and the sheep" is perhaps simplistic, but it captures an important sociological dynamic: authority and perceived credibility can concentrate decision-making amongst large groups. The more followers an individual has, the greater the potential market impact of their statements; and the more markets react to these statements, the more credibility and attention the individual will get: influence becomes self-reinforcing.

Collective investment is not inherently irrational, nor do retail investors lack independent decision-making. However, digital platforms have led to mechanisms capable of concentrating and accelerating imitation on a scale that financial regulation was not built to address. 

Financial regulation has struggled to keep pace with technological change. The fundamental challenge is therefore no longer simply to determine whether an individual deliberately manipulated a market. Instability may emerge without a mastermind, a conspiracy or even a clearly identifiable intention to manipulate. The power lies with the network itself, not simply one actor.

2. The Economic Cost of Regulatory Lag

Market manipulation is rarely illegal the moment it becomes possible; law tends to catch up only after the fact. Insider trading is the clearest precedent. The SEC was created in 1934 in the aftermath of the 1929 crisis, as a regulatory body to oversee financial markets and to protect against fraud in market transactions, among other things. Insider trading was not explicitly illegal when the SEC was created, therefore the first official case of insider trading in the US is In the Matter of Cady, Roberts & Co. (1961), almost 30 years later. France first criminalized insider trading in 1967, with the Péchiney-Triangle case being the first in 1988. The United Kingdom’s law was drafted in 1986, with the first cases emerging in 2008. Japan’s reform happened in 1988, and even then, a second-hand tippee could still legally continue with the transaction. 

That gap between law and enforcement persists, and it is highly uneven across jurisdictions. In FY25 alone, the SEC brought 31 cases of insider trading, totaling almost $8.3 million in penalties (including disgorgement, prejudgment interest and civil penalties). At the same time, Japan reported 15 cases, totaling less than $200 thousand in penalties. 

The distinction matters economically, not just legally. Bhattacharya and Daouk found that passing an insider-trading law has no measurable effect on a country's cost of equity, but enforcing one does, lowering it by an average of roughly 5%.

Economists are not unanimous on whether insider trading is actually harmful to markets, which is part of why enforcement took decades to catch up with the law. Henry Manne made the original efficiency case: insiders trading on private information push stock prices toward their true value faster, so permitting the practice should, in theory, make markets more informationally efficient. However, evidence has tended to side with the critics. Laura Beny's cross-country studies found that countries with more stringent insider trading laws have more dispersed share ownership, more accurate stock prices, and more liquid equity markets. Combined with Bhattacharya and Daouk's finding on enforcement and cost of equity, the suggestion is that unchecked informational asymmetry is not a victimless inefficiency that markets price away on their own, but a real, measurable drag on market development. That is the backdrop against which social media's capacity to create new, even larger, informational asymmetries while amplifying the current ones should be read.

Insider trading regulations were built around a specific kind of actor: an identifiable insider, acting for personal profit. Social media seems to weaken each of these assumptions. The person moving a price may be anonymous, one of thousands of coordinated accounts, and may not be trying to profit at all. If markets pay a measurable price when a privileged few trade on information that others lack, they are far more vulnerable when that asymmetry can be manufactured at scale, by actors that can hardly be identified or sanctioned.

3. A New Accessible Tool for Economic Warfare

The same characteristics that make social media so powerful for individual investors also make it potentially useful to state and non-state actors. Social media accounts can be created anonymously within seconds, while thousands of accounts can be coordinated to manufacture the appearance of a genuine trend. In financial markets, where information can trigger trading decisions within minutes, even a short-lived narrative can have real consequences. A fabricated rumour about a company, bank or strategic sector could trigger selling before regulators or the company concerned have time to establish the truth.

This creates a new vulnerability in financial markets. Unlike conventional economic sanctions or cyberattacks, a social-media operation requires relatively few resources. The objective would not necessarily be to profit from a manipulated asset. A state or organised group could instead seek to undermine confidence in a company, a particular sector, or state, potentially exploiting an existing period of geopolitical uncertainty. The danger is amplified by the “herd behaviour” described above. Once a narrative begins to gain traction, retail investors do not necessarily need to believe it to act upon it, and institutional investors may not have a choice when they see their values crashing. A manufactured rumour can therefore become a self-reinforcing market event: social-media activity triggers selling, selling moves the price, and the price movement provides apparent confirmation of the original claim.

This possibility is no longer entirely theoretical. Recent research has found that automated social-media accounts can target financial assets and amplify market stress, while other research has identified links between corporate misinformation and foreign social media accounts. NATO’s Strategic Communications Centre of Excellence even documented social-media manipulation by state and non-state actors as part of the broader information-warfare landscape.

What was once largely the domain of banks, brokers and professional investors is now accessible to anyone with a smartphone. GameStop demonstrated the power of collective retail behaviour; Musk and McAfee illustrate the influence that individual accounts can acquire; and the geopolitical dimension shows how the same mechanisms could potentially be exploited by organised actors.

The problem is not that social media influences markets. Markets have always been influenced by information, sentiment and collective behaviour. The problem is that the scale and speed of that influence have changed faster than the regulatory frameworks. A tweet, a Reddit post or a coordinated online narrative can now influence investment decisions almost instantaneously, while determining whether that influence constitutes legitimate market behaviour or manipulation becomes more difficult.

Until financial regulation catches up with this reality, investors cannot afford to ignore social media. Online discussions may contain misinformation, speculation or deliberate attempts to influence prices, but they have nevertheless become an important part of the information environment surrounding financial markets. Ignoring them entirely would therefore mean ignoring a significant source of market-moving information.

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