From an all-time high of $347.51 in late January, GameStop shares have started to slide. It seems to signal the waning stages of a tumultuous ride, in which retail investors on Reddit boosted the stock, trying to squeeze short-sellers who were betting against the company. The brief, heady rally made traders sit up and buy GameStop stock the world over. That prompts the question: Could a saga like GameStop ever occur in any other country?
Not likely, experts said—for three main reasons.
No other country loves short-selling as much as the U.S. “Because short sellers are never very popular politically, countries with a more conservative regulatory philosophy are often reluctant to facilitate it,” said Donald Langevoort, who teaches securities regulation at the Georgetown University Law Center. Betting against a firm’s stock can appear predatory—famously, Elon Musk called short-sellers “jerks who want us to die”—but economists argue that short-selling helps identify which companies are healthy and which aren’t.
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 shorting stocks during periods of market instability; South Korea, for instance, prohibited short-selling last March, as the pandemic spread, and recently the government extended the curtailment until May 2. Even in a country like Germany, which has always permitted short-selling, the level of speculative shorting activity is far lower than in the US, said Andreas Hackethal, a professor of finance at Goethe University in Frankfurt. “The practice is still quite debated, and sometimes the hedge funds and investors who are short-sellers—they’re seen as the bad guys,” he said. “Even prominent funds of German provenance would be very hesitant to do a lot of short-selling, because it would risk strong reputational damage.”
In the U.S., retail traders account for roughly 25% of stock volume. Those numbers spiked, in particular, because of the pandemic, when millions of Americans, forced to stay home, began trading online. Last December, Bloomberg reported that at least eight million people opened new brokerage accounts in the first nine months of 2020. A few other countries have higher retail engagement with the markets—nearly 70%, for instance, in South Korea—but none that couple that level of participation with high short-selling activity.
Menachem Brenner, a professor of finance at New York University, singled out the particular ease in America of “opening an account with a small (zero) amount of money; practically no need 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 the world over now, but they operate within local contexts and rules. In Israel, Brenner said, retail investors cannot open accounts with zero funds, the way Robinhood and other platforms allow in the US. Israel’s Securities Authority also requires every broker to ask retail investors about their knowledge and experience of the securities market before they’re approved to trade.
Many countries have been trying to enlarge their pools of retail investors. In Germany, Hackethal said, pockets of day traders are active on apps like Trade Republic, the equivalent of Robinhood. But the presence of a strong pension system perhaps removes the incentive for regular people to dabble in the markets, he said. “There’s still a perception that equity ownership is for the rich, who want to manage their wealth.”
The U.S. stock markets are the most liquid in the world, Brenner said—by which he meant that traders wishing to buy or sell any stock at any time will generally find sellers or buyers of the stock with whom they can do business. “Stocks that are not liquid will become liquid once an individual who has many followers on social media will decide to recommend a stock or a commodity,” he said. Promoting liquidity is a policy 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 exchange itself measures its liquidity by the slimness of its bid-ask spreads, or the differences between the prices that buyers are willing to pay and sellers are willing to take. Data from the NYSE shows its narrowest quoted spread at 0.46%—smaller, for instance, than Nasdaq’s 2.53%. The narrowness is an indicator of how effectively buyers can be matched to sellers, but also of how easily investors can enter and exit positions. During the GameStop rally, that mobility meant that a Reddit rallying cry to buy GameStop could result in a stampeding purchase for shares—and that there would be shares on the NYSE for the stampeders to buy.