Europe's Own Retail Stock Frenzy? Now That's Really Dumb!

Depicted entertainingly enough in Dumb Money, the hysteria was driven by WallStreetBets bloggers pumping up the price of little-known GameStop, which put a short squeeze on hedge fund Melvin Capital. But one can't help but think of the phrase "only in America" when this type of market scenario occurs. 

Away from the glitz and glamour of the big screen, the US has a very different stock market structure to Europe.

GameStop frenzy reinforces need for quality in US stocks

Sure, European interest in retail investing has risen in recent times. Retail trading was roughly 3% in Europe, up until the pandemic where that spiked to around 6%. But this is still a drop in the ocean in comparison to the US, where retail investors' share of total equities trading volume is now approaching a staggering 25%.

Unlike globally traded US equities, European stocks are still heavily domestic-focused. Therefore, outside of the world of Hollywood, it is hard to fathom how retail investors across multiple different European markets could all group together to create mass delirium in one particular stock.

Also consider these hard empirical logistical facts. European markets typically have much shorter trading hours compared to the US - opening later and closing earlier due to time zone differences. In contrast, US stock markets have longer trading hours, starting in the early morning and closing in the late afternoon.

GameStop saga prompts Gen Z to invest for the first time

Then there is the fact that European stock markets are fragmented, with several national stock exchanges such as the London Stock Exchange, Euronext, SIX, Deutsche Börse and Borsa Italiana.

While the EU has made efforts to integrate these markets through initiatives like MiFID, the result of a certain referendum has only served to increase fragmentation.

The US stock market, on the other hand, is much more centralised, primarily consisting of a few major exchanges like the New York Stock Exchange and the Nasdaq - overseen by the Securities and Exchange Commission - as opposed to multiple different regulators. 

Above all, however - and this gets to the heart of why GameStop happened - the culture of US investment is much more willing to take on higher risk for potentially higher returns. The culture of entrepreneurship and innovation has led to a focus on growth stocks.

On the other side of the pond, investors tend to have a longer-term investment approach and a greater focus on dividend income. There's often a more cautious attitude towards risk and a preference for established companies - as opposed to betting on the next GameStop. 

The ETFs most exposed to Reddit darling GameStop

Dumb Money will once again spark further discussions about the role of individual investors in capital markets, the power of social media movements on investing, and the dynamics of short selling, but this should not mask the fact that major cultural and behavioural differences between the US and Europe make the "next GameStop" event much less likely on the continent.

Without question, a greater focus on risk, both for the retail brokers and hedge funds interacting with the likes of Robinhood, is of paramount importance. Ultimately though, GameStop happened during an era of where the average Joe had spare cash to burn, not to mention time to relentlessly sell a trade idea to millions of people through social media.

Could this happen again? More than likely. Will it happen on European shores? Well, perhaps only in Hollywood.

By Tim Focas, head of capital markets, Aspectus Group 

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