EU watchdog sounds alarm over risk of abrupt market correction

The EU’s financial markets watchdog cautioned on Thursday that markets could experience a sudden downturn as elevated asset valuations and macroeconomic uncertainty increases vulnerabilities across the system.

The European Securities and Markets Authority also clarified operational risks across financial markets were escalating due to an intensifying threat landscape, fueled by growing cyber threats and advances in AI that can discover and exploit security flaws.

ESMA reemphasized its ongoing worries regarding shocks in crypto markets could spread into the wider financial ecosystem.

The regulator also underscored the growing risks surrounding institutional interest in fast-growing prediction markets particularly as investment funds and exchanges enter the space.

In this connection, ESMA said: “Market manipulation and insider trading risks reach new levels in ​the context of prediction markets.”

“A growing number of incidents illustrates that ​prediction markets are rife with insider trading," it added in the report.”

Nonetheless, the ESMA noted that markets created for the explicit purpose of trading event outcomes including sports, wars, and elections often rely on crypto deliberately obscuring information and enabling coordinated market manipulation.