The GameStop retail trader outrage in the United States is in many ways the perfect moment to champion technology-driven alternatives in Indonesia.
Trade settlement infrastructure in 2021 still requires financial institutions to post billions of dollars each in capital requirements, while settlement times can take up to multiple days and involve multiple parties. The result is an inefficient, costly, and cumbersome hidden back-end to capital markets that popular retail broker Robinhood was on the sharp end during the early part of 2021.
The technology to solve this problem for clearing houses, regulators, and financial institutions (banks, brokers, and exchanges) is already here. Specifically, blockchain or distributed ledger technology (DLT) shows the most promise in delivering instant clearing times and dramatically reducing capital requirements as well as parties involved.
Thus, there are many lessons from the GameStop saga for many capital markets around the world, including that of Indonesia.
GameStop, the struggling US video game retailer, saw its stock market value surge over 2,000 per cent (from US$13 to US$300) after retail investors flocked to buy the company’s shares and stock options to spite hedge fund managers, who had long been shorting the shares.
Using online forums and empowered by new trading apps like Robinhood, which makes it easier for ordinary citizens to buy and sell stocks, thousands of small investors co-ordinated and systematically drove the price of GameStop up.
Granted in Indonesia, average trading volume of short selling remains low when compared to the normal trading volume while the average free-float of short-sold shares is also well below any alarming figures.
Furthermore, with minimal hedge fund focus on Indonesia, small unorganised universe of retail investors, the absence of a unified online platform where investors can band together, and strong regulatory grip on market volatility, Indonesian regulators are likely to contend the IDX is unlikely to ever encounter a similar situation to the market frenzy like the GameStop episode.
A fund manager in malaysia however points out “ripples of that upheaval did reach the shores of Malaysia, shortly thereafter when the share price of glove makers such as Top Glove jumped as much as 15% while Rival Hartalega surged as much as 10% and Supermax climbed as much as 9.2%, driven by the online community under the name of Bursabets in Malaysia”.
In December 2020, Delta Electronics in Thailand too, saw its share prices rise on the back of high demand and low liquidity, driven by the manipulation of high-net-worth retail investors. Therefore, to claim this cannot happen in ASEAN is not entirely true.
Across many markets including in Indonesia, short selling is often restricted to large market capitalisation stocks and the maximum volume of shares that brokers can offer for short selling is often capped by the companies’ capital funds.
The volume of stocks that can be short sold must also not exceed the percentage the exchange specified for the stock. Moreover, the derivative products range on the Indonesia Stock Exchange (IDX) that could potentially create a double-leveraged position are also quite limited.
Granted, there may be namesake put and call option products available but these are often heavily ringfenced by market regulators, “enough to eliminate any possibility for a single stock option to have a singularly large impact on the price of an underlying shares of a given company”, according to the CIO at an Jakarta-based private pension fund.
Using online forums and empowered by new trading apps like Robinhood, which makes it easier for ordinary citizens to buy and sell stocks, thousands of small investors co-ordinated and systematically drove the price of GameStop up. This led to hedge funds losing billions. Retail investors then began using this strategy on other stocks, inflicting over US$20 billion in losses across January and February 2021.
To argue this herd selling was only limited to small cap stocks would also be a mistake. In the weeks following the GameStop saga, American Airlines, BlackBerry, Nokia, Eastman Kodak, AMC and other formerly downtrodden stocks saw extreme swings too.
But why should the new generation of millennial traders not be allowed to take full advantage of all the tools and free trade platforms available on their phones, one might ask? “Retail investors who clubbed together may win once or twice but in the long term, deep pocketed financial institutions are able to inflict unimaginable losses to the guy on the street should the factors turn against them”, according to a leading broker in Singapore.
Online forums on platforms used by retail investors should therefore be monitored and if necessary. taken down. Regulators should also ensure online trading platforms take up the responsibility of blocking investors from buying certain shares if there are indications of coordinated buying.
Granted this is in many ways, unfair. For the last 50-odd years powerful financial institutions have held great influence over the direction of the market, yet ordinary investors are being denied a forum, a platform to trade and participate in the market because the interests of powerful banks and funds are threatened, highlighting how the system is ultimately rigged in favour of the established players.
In the end, “speculation is genuinely necessary in a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it’s a necessary evil, and it needs to be limited”, added the broker from Singapore.
But brokerages have been making it ever-easier for novices to get into the market, trade and speculate. Commissions have dropped to zero, and people can trade on their phones, democratising market access. As each barrier to trading has fallen, consumer advocates cheered the broadening playing field. But too-easy trading could encourage people to make too many trades that are too risky for them.
It is therefore far more sensible to educate all investors about the risks of bubbles and overzealous trading, to ensure they understand the need to exercise the utmost caution before joining social media-led stock frenzies of this nature.
OJK & IDX too, meanwhile ought to explore blockchain or distributed ledger technology (DLT) given how it appears to be the most promising option in delivering instant clearing times and dramatically reducing capital requirements, a win-win for all.
Only by investing in tomorrow’s technology today, and ensuring retail investors have a fair playing field, the Indonesian equity capital will continue to advance without hiccups. Else, what played out in Thailand in December 2020 and Malaysia in February 2021 could just as well happen in Indonesia when one least expects it.