For several days now, the rocketing share price of US company GameStop Corp. (NYSE: GME) has not left the headlines. Several other companies on US exchanges have seen double-digit or more percentage jumps in their share prices with no connection to their activities, propelled by purchases by masses of small investors trading through apps and following recommendations on social media.
This phenomenon has also thrown a spotlight on a rise in activity by the general public on the Tel Aviv Stock Exchange, as manifest in a record number of securities accounts opened in 2020, and raises the question whether something similar could happen on the local stock market.
"There are large differences between the local and US markets, and so we don't see a prospect of something taking place on the Tel Aviv Stock Exchange such as has happened in the US" says Yaniv Pagot, EVP head of trading, indexes and derivatives, Tel Aviv Stock Exchange, but adds, "I can't say that it's impossible, so we have to study what happened there and make the required adjustments, insofar as they may be necessary, from the regulation level, down to the customer.
"The nature of trading here is conservative, and it is more regulated than in the US, and so the likelihood of an event of this kind is smaller, but, as a system, we have to re-adapt to these new phenomena.
"Here, the Israel Securities Authority has greater control over what happens on Internet forums," Pagot explains, "and not everyone can write whatever they want, as they can in the US, but one of the lessons of this event is that there is room to discuss the question of portfolio managers and investment advisers, who are currently limited by regulation in how they express themselves concerning stocks."
Low distribution of stock ownership
The structure of the US capital market is different from that of the Israeli market, and the distribution of stock ownership among the general public is substantially lower than it is in the US, making it difficult for extreme moves to take place such as happened in the US market.
In addition, the local finance market is much more conservative, and does not allow such an easy flow of credit as in the US.
Whereas in the US part of the activity in question is fueled by large amounts of credit, in Israel, the banks and financing bodies are more conservative and are not keen to give credit for buying securities, so that an investor would find it hard to leverage himself in order to start trading, which means that we are not likely to see the kind of activity seen in the US backed by massive credit.
Furthermore, activity by the general public and private investors has been high on the US market for many years, whereas in Israel such activity is on a low level, even in comparison with other overseas markets, and even after last year's growth - a trend seen in other markets besides the Israeli one.
There are also differences between the ways in which hedge funds, which carry out sophisticated transactions in shares, operate in the two markets.
"Trading in Israel is much less leveraged, and short positions are much smaller than they are in the US," Pagot says. "Financial institutions in Israel are very conservative in their preparedness to borrow securities. The local hedge fund industry's short selling activity is also at a low level, and is mainly in major stocks."
In Israel there is, however, the phenomenon of trendy stocks that rise steeply for a short while, sometimes just because of the mention of the name of the company in the context of whatever sector is hot at the time, and then often collapse.
This has happened in the past few years with cannabis companies, digital currencies, and other fields. The company in question is usually characterized by low trading volumes in its shares, making it easier to affect its price with small investments.
On the problem of such fashionable stocks, Pagot says, "Financial education is a large part of the solution to this kind of thing, and the understanding that as long as the purchase or sale of a stock take place on the basis of analysis of the company's business, then that's fine, but not investment on the basis of rumors and unfounded assumptions."
Tel Aviv Stock Exchange figures show that, in 2020, stock exchange members - banks and investment houses - enjoyed 44% growth over 2019 in new client account numbers. 141,000 new accounts were opened in 2020, up from 98,000 in 2019. "The rate at which new accounts are being opened with stock exchange members is still rising," the Tel Aviv Stock Exchange says. December 2020 saw the highest number of new accounts opened, at nearly 22,000.
The stock exchange found that a new small or medium investor - defined as an investor with trading turnover less than NIS 1 million monthly - carried out about five trades a month, a similar level to that of 2018-2019, with an average monthly turnover of NIS 55,000, 4% higher than in 2019."
The turnover on new accounts in 2020 represented less than 1.5% of total trading turnover on the Tel Aviv Stock Exchange, a proportion similar to that of previous years.
Published by Globes, Israel business news - en.globes.co.il - on February 1, 2021
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