From the high of $ 347.51 at the end of January, GameStop shares began to slide. This appears to be a sign of the waning stages of a tumultuous ride, in which retail investors on Reddit have increased their stakes and are trying to push short sellers betting against the company. The short, intoxicating rally has left traders sitting up and buying GameStop shares around the world. This begs the question: can a saga like GameStop ever occur in any other country?
Experts probably did not say probably – for three main reasons.
America’s penchant for the short
No other country likes short sales as much as the US “Because short sellers are never very popular politically, countries with a more conservative regulatory philosophy are reluctant to facilitate it,” says Donald Langevoort, who gives education regulations to Georgetown University Law. Centre. Contests on the share of a business can seem predatory – Elon Musk calls it short-sellers ‘jerks who want us to die’ – but economists argue that short-selling helps identify which companies are healthy and which are not.
In some countries, such as India or Finland, short sales until a decade or two ago were illegal. Other countries, including advanced financial markets, have temporarily banned short circuits during periods of market instability; South Korea, for example, banned short sales last March as the pandemic spread, and recently the government extended the cut to 2 May. Even in a country like Germany, which has always allowed short selling, the level of speculative shorting activity is. is much lower than in the US, said Andreas Hackethal, a professor of finance at Goethe University in Frankfurt. “The practice is still fairly discussed, and sometimes the hedge funds and investors who are short sellers are considered the bad guys,” he said. “Even prominent funds of German origin would be very reluctant to make many short sales, as this would cause strong reputational damage.”
The boom in retail investment
In the US, retailers account for about 25% of inventory volume. These numbers increased especially as a result of the pandemic, when millions of Americans were forced to stay at home, started trading online. Last December, Bloomberg reported that at least eight million people had opened new brokerage accounts in the first nine months of 2020. A few other countries have a greater retail involvement in the markets – for example in South Korea – almost 70%, but none in the couple. that level of participation with a high short selling activity.
Menachem Brenner, a professor of finance at New York University, singled out the convenience in America of ” opening an account with a small (zero) amount; it is virtually not necessary to claim knowledge or experience in trading stocks, bonds and options; and the ability to trade on margin, [with] no trading fees. Similar brokerage platforms are available worldwide, but they work within local contexts and rules. In Israel, Brenner said, retail investors cannot open accounts with no funds, as Robinhood and other U.S. platforms allow. The Israeli Securities Authority also requires every broker to ask retail investors about their knowledge and experience of the security market before they are approved to trade.
Many countries have tried to enlarge their pools of retail investors. In Germany, Hackethal said, bags of day traders are active in programs like Trade Republic, the equivalent of Robinhood. But the presence of a strong pension system may remove the incentive for ordinary people to splurge on the markets, he said. “There is still a perception that the rich, who want to manage their wealth, own shares.”
The liquidity of the markets
The U.S. stock markets are the most liquid in the world, Brenner said – meaning that traders who want to buy or sell stocks at any given time will usually find sellers or buyers of the stocks they can trade with. “Stocks that are not liquid will become liquid as soon as an individual who has a lot of followers on social media decides to recommend a stock or commodity,” he said. Promoting liquidity is a policy priority for regulatory agencies such as the Securities and Exchange Commission.
The most liquid stock exchange in the world is the New York Stock Exchange (NYSE), where GameStop is listed. The stock market itself measures its liquidity by the narrowness of its bid-ask spreads, or the differences between the prices buyers are willing to pay and sellers are willing to take. Data from the NYSE shows the smallest listed spread at 0.46% – for example smaller than the 2.53% of Nasdaq. The accuracy is an indication of how effectively buyers can be linked to sellers, but also how easily investors can enter and exit positions. During the GameStop rally, the mobility meant that a call from Reddit to buy GameStop could cause a decline in shares – and that there would be shares on the NYSE that the bumpers could buy.