Direct Register Shares (DRS)
What is DRS and why should everyone do it with their shares?
The Direct Registration System allows any company that issues stock to use a third-party company to maintain a stockholder record of exactly which investors own each and every share that exists. It can be compared to a digital stock certification. GameStop chose Computershare as their third-party company or “transfer agent”. They're the transfer agent for many companies and have been in business since 1978.
Computershare is the chosen transfer agent of over a third of the US Stock Market e.g.:
Overstock (they offered the first crypto dividend)
More information on Transfer Agents: https://www.investopedia.com/terms/t/transferagent.asp
The Distribution of Shares
Before computers, paper certificates were mailed to you, the investor, with “Your Name” on every share you own. Nowadays, book entries are used in place of paper certificates. Originally, this was intended purely to speed up the process and get rid of unnecessary paperwork. The institutions created to handle the book entries and clearing of trades have over the course of the few decades merged into a single private organization known as the DTCC (Depository Trust and Clearing Corporation).
When you use a broker to buy stock the DTCC’s subsidiary, the DTC (Cede & Co.), is the name that is entered on the “books” at Computershare for every single existing share. You are only the “beneficial owner” on your broker’s books who is the “beneficial owner” on the DTCC’s books. The DTCC is the primary owner, the broker the secondary owner, and the average investor is a tertiary owner on the share that they bought and paid for. The only way for an average investor to be the primary owner of any shares of stock they purchase is to DRS that stock. It puts them on the same level of ownership as the DTCC - directly registered in the ledger of the company whose stock they own.
This is an often missed distinction between the terms “shares” and “stock” (Source):
Registered stockholders truly have possession of their ownership interest and are listed by name in the company’s ledger; shareholders cede their ownership rights to others like the DTCC’s ‘Cede’ & Co & broker-dealers and only share ownership.
What is Short Selling?
To understand why Direct Registration is so profoundly important to GameStop, you’ve first got to understand what short selling is. When most people invest in the stock market, they invest in companies they believe will do well. You ideally buy low and sell high for a profit. Your worst case scenario is the company you invested in goes bankrupt and you lose all the money you invested. That stinks. Some much more experienced investors, especially hedge funds and investment bankers, make money by speculating on companies they believe are going to fail. Think of Toys'R'Us or Sears.
What happens while short selling a company:
Borrow shares from broker who is willing to lend them for a fee
Sell those shares on the open market.
Buy back the shares after the stock goes down in price (or in the short seller’s dream scenario, the shorted company becomes bankrupt and price goes $0).
Deliver the shares back to the lender and keep the price difference.
“Naked” short selling skips the 1st step in this process and sells a share without first borrowing it. So, if you short sold 1,000 shares of Sears (SHLD ticker) at $4 per share and decide to buy to close at $1, you would have made a tidy profit of $3,000! However, short selling has its downsides like any investment strategy. While the price of something can go no lower than 0, there is no limit to how high a price can go. This means short selling carries with it infinite risk.
Image: National Public Radio
What is a Short Squeeze?
Now, suppose Sears had completely turned things around in a big positive way after you short sold those 1,000 shares at $4. Instead of falling to $1, Sears actually climbed to $41. You then would have lost $37,000 (sell first at $4, buy-to-close at $41). Now, to illustrate a point, let’s exaggerate that scenario. Say you had your life savings of $50,000 in that account. You short sold 12,500 shares at $4 per share because you were convinced that Sears was going bankrupt in time. But, the price of Sears actually skyrockets overnight due to a major breaking news story. When you wake up, the price is at $20 and climbing fast. Well, at $20, you already lost your entire life savings. Plus, you owe your broker another $250,000 so far!
Let’s say that there were quite a few other people who thought Sears was headed for bankruptcy and bet short against it. Well, in a situation like this you’re all facing steep losses and the potential for them to keep mounting to infinity. As soon as one person starts buying to stem their losses, the price rises and the others who haven’t bought yet continue to lose even more money. Short sellers trade on margin (loaned money, they don’t need to have all of the cash on hand), and if they lose enough money they’ll get margin called - forcibly liquidated and forced to buy what they short sold to stop losing money and pay up to whoever was lending them money. It creates a positive feedback loop of shorts buying to save their skins and margin calls forcing shorts to buy with massive price increases as all the shorts rush for the exit - that is a short squeeze.
How does GameStop relate to DRS?
What’s happening with GameStop and why the buy button was shut off in January of 2021 has to do with a kind of short selling known as naked short selling (short selling without first finding a stock to borrow), combined with issues with share lending and years of lax regulatory oversight by the DTCC. There is no rule to how many times a single share can be lent. A borrower can lend a share to someone else, who lends it to someone else who then lends it back to the borrower again who uses this “new” share to fulfill his original share borrowing obligation. However, there has been a “phantom share” left behind on each borrower’s book and this increases the supply of shares in circulation. The shares often aren’t even truly delivered.
Every month the SEC posts failure-to-delivers data that shows billions of shares failing to be delivered - 1.5 billion in the second half of April 2022 alone. Rather than reversing the transaction, it’s allowed to fail-to-deliver and whoever it was is told they have 35 days to go get a share to deliver. Then the share to fulfill that is ultimately used to fulfill that obligation can be borrowed from somebody else, creating yet another phantom share. As if that wasn’t bad enough, the DTCC is a self regulatory organization.
Take it from Susanne Trimbath, PhD in Economics and former employee of the DTC who has written extensively on these issues over the past two decades:
“How do we explain year-long failures to settle? How do we explain that some companies are on the SEC’s list restricting short selling in their shares for repeated periods? How do we explain that at least half of the trades that fail to settle are more than two months old? There is only one explanation: lax management at the self-regulatory organizations on Wall Street, a complete failure in oversight by the SEC and a willingness to look the other way when broker members, who hold positions on the Board of Directors at the self-regulatory organizations and who may have ambitions to political appointments at the SEC, violate their duty to perform in the best interest of investors."
There is a gigantic problem at the heart of the financial system. Retail investors are directly registering GameStop in particular because it is suspected that many more shares of GameStop (and many other stocks!) exist than there should be. Once investors collectively direct register all 76 million existing GameStop shares, referred to as “locking the float”, this will undeniably and beyond-a-shadow-of-a-doubt expose the rampant corruption of Wall Street to the SEC, the Department of Justice, and the world.
Current status of the GME float
Since retail investors learned about this secret weapon against corruption last year, they began furiously Direct Registering (transferring their shares from brokers to Computershare) back in September 2021. As of April 30th, 12.7 million shares have been direct registered, or “locked”. Per Bloomberg, short interest is 15.5M or 23.89% of float.
All 76 million shares being registered would show that market participants have been egregiously participating in an unholy trinity of naked short selling, share lending, and failing-to-deliver those shares to artificially inflate the supply of shares in existence which lowers the price based on supply and demand. If this is starting to sound vaguely like counterfeiting, that’s because it essentially is - phantom shares is a term coined to distinguish this practice from physically counterfeited shares. The DTCC is the only organization that has any idea how many shares are held by each broker, yet they’re a private entity that is owned by banks and all of their chair members are part of financial institutions.
Exceptions and loopholes exist to allow for “reasonable” amounts of naked shorting in certain scenarios, but data shows that an inordinate number of shares of GameStop, among many other companies, are likely being “naked” sold-short, for the goal of extracting profit and suppressing true price discovery. There are means by which to hide huge short positions through swaps like Bill Hwang of Archegos is currently under investigation for. Once all 76 million shares are registered to peoples names at Computershare, there is no longer any plausible deniability of the exploitation of the rules by market makers and hedge funds. This forces them to “close” their positions, or buy back each and every entitlement they sold expecting a profit, and evidence points to them having sold far more shares than could ever even exist in the first place.
This is a problem which cannot be solved with bailouts, and we hope it will force the powers that be to compromise on the issue of market fairness at the very least, and ultimately about the issue of our collective peonage to a system which clearly does not work for the common person.
Larry Cheng, one of the Directors of GameStop’s board
Where did Wall Street go so Wrong?
As hedge funds/Wall Street continued selling counterfeit shares or naked shorting in 2020, this drove GameStop’s price down to $4 per share. Ryan Cohen, the co-founder and former CEO of Chewy.com was officially introduced as Gamestop's new chairman in January 2021.
Ryan Cohen convinced Wall Street that pets are big business and went head-to-head against Amazon in this major category and beat them handily. Cohen, through his investment company RC Ventures, bought 9,001,000 shares of GME stock at $8.43 per share in September 2020. Because of his substantial investment, his expertise in building a successful E-commerce business, and especially because of his strong opinion of the poor performance of GameStop’s leadership team, he wrote the following letter to GameStop’s board of Directors.
What Really Happened in January 2021
Now retail investors, fully aware of what Ryan Cohen’s expertise brings to the table, went into a worldwide buying frenzy. This sent GME's stock price soaring. As this was happening, a small amount of short sellers started to buy-to-close their short positions. This extra buying demand exerted even further upward momentum on the stock price.
Remember the example from Sears discussed earlier? That is the same catastrophic predicament the hedge funds and brokers were in on Jan. 28th of 2021. But unlike the example, it wasn’t just one person’s life savings, or even one entire bank’s assets at stake, the entire US financial system was at risk - and still is now!
"We have come dangerously close to the collapse of the entire system"
THOMAS PETERFFY, FOUNDER AND CHAIR OF INTERACTIVE BROKERS
That was why dark powers on Wall Street stepped in and Robinhood and other brokers turned off the buy button. This immediately resulted in its intended purpose of driving GME's (as well as many other heavily short-sold companies then and still maliciously referred to by MSM as “meme stocks”) stock price from $482.85 on January 28th all the way down to $193.60 on January 31st! That is why there were congressional hearings in the months afterward.
It is our conviction that all along since January 2021 and still today, Wall Street has been continually manipulating GME stock price, which is only digging their hole deeper and deeper to delay the inevitable collapse they are facing. This is being done purely in their desperate hope that Ryan Cohen and GameStop’s turnaround plan is not the raging success it is going to be. They are trying to survive “one more day”.
"Each thing we did bought us one more day...the choice was between painful and more painful"
KEN GRIFFIN, CEO OF CITADEL LLC
Unless GameStop goes bankrupt, Wall Street must inevitably buy-to-close their positions. Bankruptcy is looking extremely unlikely with the Cinderella story of GameStop’s revival by top-notch leadership & a passionate community of well-educated investors who love the stock. Either GameStop’s success will soon force them to or retail investors direct registering all 76 million shares and “locking the float” will.