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GameStop Testimony: When Short Sellers, Social Media, and Retail Investors Collide

Cato Institute | Jennifer J. Schulp | Feb 18, 2021

retail investors want to participate - GameStop Testimony:  When Short Sellers, Social Media, and Retail Investors Collide

By no means should the GameStop phenomenon result in changes that restrict retail investors’ access to the markets.

Before the Committee on Financial Services, U.S. House of Representatives


Chairwoman Waters, Ranking Member McHenry, and distinguished members of the Committee on Financial Services, my name is Jennifer Schulp, and I am the Director of Financial Regulation Studies at the Cato Institute’s Center for Monetary and Financial Alternatives.

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I thank you for the opportunity to take part in today’s hearing entitled, “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.”

Watch the testimony C-span here:

Retail Investing

Before addressing the GameStop phenomenon specifically, I’d like to address the participation of retail, or individual, investors in our public equities markets.

Retail participation has ebbed and flowed over the years, but the recent trend toward increased retail participation accelerated sharply during the pandemic. Approximately one-fifth of market trading volume is now attributable to retail orders, which is a substantial increase over 2019.1

Most commentators point to the increasing availability of zero-commission trading as drawing in more individual investors. In late 2019, many large brokerages began offering zerocommission trading, following the lead of Robinhood Financial, which introduced commissionfree trading in 2015. But several other factors also likely attracted retail investors, including the widespread availability of fractional-share trading,2 the ability to open accounts with low balances, and the ease of app-based trading platforms. Even limited entertainment options during the pandemic probably played a role in increased retail interest in investing.

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Retail participation in our equities markets is important and beneficial. Retail investors are widely understood as providing liquidity in markets. The fact that retail investors behave differently from institutional ones, and sometimes behave differently from each other—far from being a bad thing—can be particularly valuable in times of market stress. Where institutional liquidity dries up, for example, retail trading can help to lower bid-ask spreads and dampen the price impact of trades.3 In fact, retail investors may have been a market-stabilizing force during the March 2020 coronavirus-induced market crash by staying the course with their investments and buying when stock prices dipped.4

Investing in the stock market also provides an important path to wealth for individual investors.

With average annual returns for the S&P 500 during the past 60 years of approximately 8%,5 long-term investors generally benefit by being invested in the market.

There is already a strong degree of retail participation in the U.S. stock market; when measured in 2018, approximately 38% of total U.S. equities were held directly by households.6 However, only 15% of U.S. households directly hold stock.7 In other words, ownership of equities is concentrated in the hands of the comparatively few and comparatively wealthy.8

Even if you include pooled investment funds, which is how the vast majority of households indirectly hold stocks as a part of their retirement assets, ownership is still skewed towards the wealthy. In 2019, about 53% of all households had stock market investments, but only 31% of families in the bottom half of the income distribution were invested.9

Stock ownership is also highly correlated with race, education, and age.10 For example, in 2019, approximately 19% of white households directly held stock, compared to approximately 7% of Black households and 4% of Hispanic households.11 Those with a college degree are about twice as likely to directly hold stock than those who just had some college education, and more than three times more likely than those with only a high school diploma.12 And the older a person is, the more likely he or she is to own stock.13 These patterns equally apply to ownership of indirectly held stock.

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The retail investors making up this new surge, though, are different. Data released by brokerage firms identifies a high number of new clients who are first-time investors and who are younger than the average investor.

This is confirmed by recent research by the FINRA Investor Education Foundation and NORC at the University of Chicago (“FINRA/NORC Study”), which found that investors who opened a taxable investment account for the first time in 2020 were younger, had lower incomes, and were more racially diverse than those who had previously opened such accounts.15 These new investors also held lower account balances, with about a third holding account balances less than $500. Indeed, the ability to invest with a small amount of money was a commonly cited reason for opening an account for the first time in 2020.

This may portend, as one of the researchers noted, “a shift towards more equitable investment participation.”

GameStop Phenomenon

Some things seem clear. Importantly, the temporary volatility in GameStop and others did not present a systemic risk to the functioning of our markets.

As the Treasury Department recognized, following a meeting with officials from the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, the Federal Reserve, and the Federal Reserve Bank of New York, the market’s “core infrastructure was resilient during high volatility and heavy trading volume.”21

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This is not surprising. Despite the huge trading volume and rapid increase in value, the GameStop phenomenon affected a very small part of the market. GameStop’s market capitalization, even at its peak, was around $24 billion in an approximately $50 trillion market.22

And short interests, which may have been targeted by some traders, represent a small, and recently shrinking, portion of equity market value.23

Stock prices move in and out of alignment all the time, and markets are no strangers to bubbles.

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