Why the GameStop frenzy will only play out in the US for now

The trading revolution won’t be repeated in Asia and Europe owing to tighter restrictions on short selling and higher taxes and fees

GameStop logo is seen in front of displayed Reddit logo in this illustration taken February 2, 2021. REUTERS/Dado Ruvic/Illustration
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On the surface, it looks like the GameStop uproar pitting Reddit day traders against giant hedge funds is going global. New accounts at Tiger Brokers in Singapore surged last week. In the UK, Trading 212 is the most downloaded app in the country, while in Korea, GameStop is among the top 10 most-held foreign shares.

Yet even as the hype spreads, the equity trading revolution playing out in the US is unlikely to be matched anytime soon in Asia and Europe. Tighter restrictions on short selling, limited options trading and higher taxes and fees will keep it a US game for now.

“There are some important elements in the European markets that differ from the US that make it difficult to see a repeat,” said John Garvey, global financial services leader at PwC, who cited limited free trading and restricted short selling.

China would be the obvious place for it to spread further. Retail traders dominate equity markets in the world’s second-biggest economy, with stock forums like East Money Information and Xueqiu stirring up buying in Reddit-like fashion. It remains largely a one-sided bet though after short selling was curbed followed a 2015 market crash.

While restrictions have been eased, short interest accounts for a fraction of 1 per cent of the outstanding float of shares on Chinese exchanges. This compares to about 3.5 per cent for companies in the S&P 500 index, according to data from Markit. Short bets are also expensive in China, since the massive pension funds that might otherwise lend shares for a short bet are prohibited from doing do.

That means there are few if any billion-dollar hedge funds vulnerable to a short squeeze of the kind that helped fuel GameStop’s moonshot. There are also no single stock options in China, which juiced buying pressure in the US. Meanwhile, China exchange rules cap daily stock moves at 10 per cent, an anathema for day traders. Given the restrictions, hedge funds have tended to express bearish views on Chinese companies through Hong Kong or US-listed shares.

Hong Kong allows more short selling, while options trading through the city’s markets are dominated by institutions. Trading is also more opaque, so it’s tough to know which fund is shorting which stock, with no public information on bearish bets by individual funds. That’s in contrast with the US, where Melvin Capital drew the ire of the day-trading herd and suffered a 53 per cent drop last month after disclosing its massive short on GameStop.

“I just don’t think we have the retail armies in Hong Kong because historically it has been a very institutional market,” said Richard Johnston, Hong Kong-based Asia head of Albourne Partners, which advises on alternative investments. “In China, you have retail armies, but they are all on the long side.”

Elsewhere in Asia, Korean traders have jumped on the GameStop mania, buying the US stock from Seoul to ride the gain this year before this week’s collapse.

But opportunities to participate in local short squeezes are tougher to come by. The government banned short selling last year amid the pandemic, and a 30,000-strong investor group has gone as far as renting a bus decked out with anti-shorting slogans to lobby for a permanent ban.

Singapore is one Asian market that offers so-called naked shorts, in which investors don’t borrow the underlying stock to place a bet. They haven’t proven popular, however, because the bets have to be covered the same day. The city state’s central bank on Tuesday warned investors about possible “pump and dump” activities on social media platforms touting GameStop and other shares.

There are some important elements in the European markets that differ from the US that make it difficult to see a repeat

Punters got a reminder this week just how volatile the trades can be. The 50 stocks that Robinhood Markets originally put on its restricted list had added $276 billion in value from year-end to the height of the recent mania, before $167bn was wiped out in days as the trades reversed, according to data compiled by Bloomberg. GameStop tumbled 60 per cent on Tuesday, extending this week’s loss to 72 per cent.

In Europe, investors have also caught some of the day-trading buzz. Trading 212, which claims to be the UK’s first zero-commission stock broker, announced last week that it would stop signing up any new clients due to “unprecedented demand” and warned its existing clients about long delays if they tried to execute buy or sell orders in GameStop or AMC Entertainment Holdings. Freetrade, a commission-free investment app, added 40,000 clients in one day on January 27, compared with a daily average of 4,000 in the fourth quarter, a spokesperson said.

Trading has spiked as a result. The average 28-day volume for GameStop is up 400 per cent on CMC Markets’ platform in London, while it’s up 1,600 per cent for AMC. Telecom company Nokia was also caught up in the rush, with 1 billion US American Depository Receipts changing hands last Wednesday alone, compared with a 90-day average of 56 million, according to data compiled by Bloomberg.

“Client interest in equities continues to increase, which aligns with the increased volatility,” said Michael Hewson, chief market analyst at CMC Markets.

Yet higher taxes, increased regulation and a more subdued day-trading culture will likely cap the frenzy in London and other European capitals. Those buying BlackBerry and GameStop face US taxes on any gains, plus paperwork.

Free trades

“In the US, it’s very easy for people to get market access cheaply,” said Ryan Paisey, who offers online market analysis for brokers and day traders in London. “In Europe, the barriers are still quite low but they’re more than they are in America.”

While free trading platforms like eToro are starting to pop up outside the US – trying to mimic the success of Robinhood Markets in Silicon Valley – regulations and trading fees are still the norm. In response to market volatility, eToro on January 27 disabled entry and exit orders on some less liquid stocks when the market is closed and limited their trading only to transactions without leverage.

In Germany, traders need to submit a lot of personal information and pay taxes on each transaction, Guillermo Hernandez Sampere, head of trading at MPPM EK in Germany, said. “The average day trader doesn’t have the volumes to build up enough positions to justify high taxes on each transaction,” he said. Still, Mr Paisey says it’s a matter of time before the world eventually catches up to the US.

“We’ve seen a unionisation of retail trading – there’s no way that won’t spread to the UK and the rest of Europe,” he said. “Over the weekend, my phone was just non-stop with friends and family who I haven’t spoken to in years asking, ‘How can I get involved?”