From a historic high of $ 347.51 at the end of January, GameStop’s shares started to fall. It seems to signal the final stages of a tumultuous race, in which retail investors on Reddit stepped up their stocks, trying to squeeze short sellers who were betting against the company. The brief and intoxicating recovery caused investors to sit and buy GameStop shares around the world. This begs the question: could a saga like GameStop take place in any other country?
Probably not, experts said – for three main reasons.
America’s taste for short
No other country loves to short sell as much as the US “Since short sellers are never very popular politically, countries with a more conservative regulatory philosophy are often reluctant to facilitate this,” said Donald Langevoort, who teaches securities regulation at Georgetown University Law Center. Betting against a company’s stock may seem predatory – notoriously, Elon Musk called short sellers “idiots who want us to die” – but economists argue that short selling helps to identify which companies are healthy and which ones they are not.
In some countries, such as India or Finland, short selling was illegal until a decade or two ago. Other countries, including advanced financial markets, have imposed temporary bans on short shares during periods of market instability; South Korea, for example, banned short selling last March as the pandemic spread, and the government recently extended the restriction until May 2. Even in a country like Germany, which has always allowed short selling, the level of speculative short selling activity is much lower than in the United States, said Andreas Hackethal, professor of finance at Goethe University in Frankfurt. “The practice is still hotly debated, and sometimes hedge funds and investors who sell short – are seen as the bad guys,” he said. “Even prominent German-born funds would hesitate to make a lot of short sales, because doing so could cause serious damage to their reputation.”
The retail investment boom
In the US, retailers account for about 25% of inventory volume. These numbers skyrocketed, in particular because of the pandemic, when millions of Americans, forced to stay at home, began to trade online. Last December, Bloomberg reported that at least eight million people opened new brokerage accounts in the first nine months of 2020. Some other countries have greater retail involvement with the markets – almost 70%, for example, in South Korea – but none of this level of participation with high short selling activity.
Menachem Brenner, professor of finance at New York University, highlighted the particular ease in America of “opening an account with a small (zero) amount of money; there is virtually no need to claim knowledge or experience in the trading of stocks, bonds and options; and the ability to trade with margin, [with] no trading fees. ”Similar brokerage platforms are available worldwide now, but operate within local contexts and rules. In Israel, Brenner said, retail investors cannot open accounts with zero funds, as Robinhood and other platforms allow in the United States. The Israeli Securities Authority also requires all brokers to ask retail investors about their knowledge and experience in the securities market before they are approved to trade.
Many countries have tried to expand their retail investor pools. In Germany, Hackethal said, pockets of day traders are active in apps like Trade Republic, the equivalent of Robinhood. But the presence of a strong pension system may remove the incentive for ordinary people to get involved in the markets, he said. “There is still a perception that property ownership is for the wealthy, who want to manage their wealth.”
Market liquidity
The US stock markets are the most liquid in the world, Brenner said – by which he meant that traders who wish to buy or sell any stock at any time will generally find sellers or buyers of shares with whom they can do business. “Shares that are not liquid will become liquid when an individual with a lot of social media followers decides to recommend a stock or commodity,” he said. Promoting liquidity is a political priority for regulatory agencies like 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 by the differences between the prices that buyers are willing to pay and sellers. NYSE data show its narrowest spread spread at 0.46% – lower, for example, than Nasdaq’s 2.53%. Narrowness is an indicator of how effectively buyers can be combined with sellers, but also of the ease with which investors can enter and exit positions. During GameStop’s recovery, this mobility meant that a Reddit rallying cry to buy GameStop could result in a skyrocketing purchase of shares – and that there would be shares on the NYSE for stampeders to buy.