GameStop and the Great Direct Registration Experiment

Direct registration is a hot topic in GameStop-centric subreddits.

The feed of r/Superstonk, the most prominent of the bunch, features post after post after post of white backgrounds with off-center thick purple rings. Occasionally, the purple donut parade is spliced with photos of black-and-white documents and a few personal items – some Pokemon cards, a rock climbing rope and clip, even a lacy hot pink thong – over a barcode.

Although there is an exceptionally high volume of these posts, each one has thousands of upvotes and numerous awards.

The purple circles are proof of direct registration of shares with GameStop’s transfer agent, ComputerShare. In ComputerShare’s user interface, portfolio holdings are represented visually by rings, each holding represented by its own color and proportion of portfolio value. A fully purple circle represents a portfolio that is 100% in one holding – all in.

Prevailing sentiment among the GameStop subreddits is that direct registration is key to preventing ongoing market manipulation and price suppression of their favorite stock.

Whether or not that is true is uncertain; GameStop individual investors are sailing into uncharted territory. There is no historical precedent of a public company having a mass wave of direct share registration by individual investors in a company that was not at an acute risk of bankruptcy.

Here, we’ll dive into the back story,  the impetus behind mass direct registration, and why what GameStop shareholders are doing, regardless of outcome, is historic.

GameStop individual investors on a treadmill

Fueled by the events of late-January, GameStop investors dug deeper into the machinery of the markets.

According to the subreddit’s most popular due diligence posts, the reduction in reported short interest was really just clever book cooking by Wall Street, who had shuffled things around to obscure the real picture. Prevailing sentiment was that Wall Street not only failed to close their short positions, but continued to short the stock throughout 2021 in order to suppress price.

Perhaps one of the most groundbreaking revelations for many individual investors in the wake of the January run-up was that they didn’t actually own any stock. That’s not only true for GameStop. It’s true for almost every equity held in any brokerage account.

Almost every stock certificate in America is registered to the DTCC’s nominee, Cede & Co. Legally, Cede & Co. effectively has a monopoly on the American stock market. When investors buy shares through a broker, they get what amounts to the slop of legal ownership rights. Cede & Co. remains the registered owner of shares.

GameStop’s stock borrow fee curiosities

One of the most compelling idiosyncrasies of the GameStop saga is the curiously persistent low stock borrow fee.

Short sellers pay brokers an interest rate in exchange for access to the shares for which the broker is a “custodian.” In other words, they monetize by lending out their “customers'” shares to short sellers. (In reality, short sellers are brokerages’ real customers).

Short sellers borrow shares from real investors, often without the real investor knowing it, and sell I.O.U.s into the market. By hitting the market with this extra, indistinguishable supply, short sellers drive the prices of the stocks down, then buy them back lower and pocket the difference. The more money they have, the more they can drive the price down, particularly if stock borrow fees are low.

The broker is happy to offer up their account holders’ shares to short sellers. Stock lending fees are a major source of broker revenue. It’s hard to imagine a more conspicuous conflict of interest.

Additionally, stock borrow interest rates are usually a function of supply and demand. If there aren’t many shares to borrow, the short seller has to pay the broker higher interest rates to access more ammo. Stock borrow fees can get very high, making it costly for short sellers to maintain their position. As the stock borrow interest rate climbs upwards, short sellers are increasingly incentivized to close out their short position, even if it means taking a large loss.

The stock borrow fee of GameStop has remained exceptionally and questionably low for the better part of 2021.

For example, iBorrowdesk’s one-year chart shows GameStop’s stock borrow fee started behaving curiously after January. IBorrowDesk only reflects the lendable shares of Interactive Brokers, the world’s largest broker. For some reason, Interactive Brokers kept the stock borrow fee for GameStop at less than 1%, even when they got down to their last few hundred shares, at which point they could have easily charged more.

In fact, between early December 2020 – the earliest stages of individual investor interest in GameStop stock – and the end of January 2021, Interactive Broker’s stock borrow fee for GameStop never dipped lower than 16%.

In the weeks leading up to GameStop’s highest price point in late January, the stock borrow fee skyrocketed, peaking at 84% on January 26th, 2021. At those rates, keeping short positions open on GameStop was cost prohibitive, particularly for large positions.

Two days later, Robinhood and other brokerages shut the buy button off on GameStop stock and a handful of other securities.

Simultaneously, millions of shares became available to borrow on Interactive Brokers. As expected, the stock borrow fee fell precipitously.

By the time Robinhood and other brokers enabled the buy button on their platforms on February 04, 2021, the stock borrow fee had dropped from its peak of 84% to 10%. One week later, it was at 2%.

With the exception of a small run up that coincided with the late February $40 to $105 rise in price, the stock borrow fee has consistently stayed at or below one percent since March 13, 2021. It has stayed that low, regardless if the broker reported 1,000 or 800,000 lendable shares.

To double up on the abnormalities, Fidelity, the largest broker in the U.S., also left money on the table by listing GameStop’s stock borrow fee at less than one percent, regardless of how many shares they listed as lendable. It’s quite unlike anyone on Wall Street to charge less where they can charge more.

Unfortunately for GameStop individual investors, it is incredibly affordable to short GameStop. It’s one of the lowest stock lending interest rates of any security on the market, and has been all year. If there really are massive outstanding open short positions, at these rates, they can stay open for years. It’s certainly cheaper than trying to close them as liquidity gets drier and drier, priming conditions for a rapid price increase if any meaningful buy pressure hits the tape.

With brokers always finding more lendable shares and continually lending (even when GameStop hit ‘hard to borrow’ lists), short sellers could avoid closing out with massive losses.

In brokers we don’t trust

But if there weren’t any shares to borrow, there would be nothing to artificially suppress the price with.

In theory, there are settings investors can change within their brokerage accounts to prevent their tally of shares from being lent out. If investors made their shares unlendable, brokers wouldn’t lend their shares to short sellers.

According to the Terms of Service for Fidelity, Robinhood, and other brokerage firms, shares held in a cash account (as opposed to a margin account) are unlendable. In many cases, brokerage account default settings allow for stock lending.

GameStop investors called their brokers en masse requesting that their shares be prohibited from being lent out. Yet, day after day, brokers posted lendable shares.

There have been numerous posts by individual investors about their accounts mysteriously reverting back to margin accounts. This was most often noticed when they changed brokers.

But after brokers shut off GameStop’s buy button during the January price run, a high volume of GameStop investors left their brokers. Robinhood in particular took a public flogging, though it wasn’t the only broker to restrict GameStop trading. WeBull, eToro, E-Trade, Interactive Brokers and others did the same. This is important, because it is not the only case of several ostensibly independently functioning brokers handling GameStop trading in ways that are counterintuitive.

During this mass exodus, GameStop-oriented subreddits posted dozens of examples of their shares arriving in their new brokerage accounts with a strange phenomenon: Their cost per share basis was significantly higher than what they had really paid for it.

In some cases, the reported cost per share were higher than GameStop’s peak price point of $483 on January 28, 2021.

GameStop investors speculated that brokers actually bought shares at the time of transfer, not at the time investors had given their brokers money. Considering that more than half of GameStop’s trading activity occurred in dark pools in 2021, these mysterious, exceptionally expensive purchases were presumably made “off the tape.”

Upon rumors that Fidelity had never shut the buy button off, and in part due to billionaire Mark Cuban’s recommendation to find a broker with trillions of dollars on the balance sheet, Fidelity became the broker of choice for GameStop individual investors.

But Fidelity would fail to live up to its name in the eyes of individual investors.

Dr. Trimbath and direct registration

In late April, Dr. Susanne Trimbath agreed to do an Ask Me Anything with GameStop individual investors on r/Superstonk.

Trimbath holds a Ph.D in economics from New York University as well as an MBA from Golden Gate University. She worked at Federal Reserve Bank of San Fransisco for over five years and at the Depository Trust Company for six years. Her book Naked, Short, and Greedy: Wall Street’s Failure to Deliver outlines how settlement systems enable naked short selling of equities by letting failures to deliver happen in droves with no repercussions nor intervention.

Trimbath is arguably the most knowledgable person on the loopholes in the machinery of the stock market out there. She may be one of the only people who has been on the inside of these organizations honest enough to point out the systemic risk they present and destruction they cause.

It was during Trimbath’s AMA that many GameStop individual investors first learned about direct registration.

“An individual can still ask to have their shares registered in their own name,” Trimbath says within the first five minutes of the interview. “GameStop has a direct stock purchase program where you can just buy your shares from them.”

Though Trimbath’s Ask Me Anything occurred in late April, it would be months before the potential of what she had said would be widely realized by the GameStop individual investors.

Direct registration: My share, my name

As time went on, GameStop’s stock borrow fee continued to hover at around one percent. Lendable shares always became available. GameStop’s stock continued to be relentlessly shorted.

With all the shares legally registered in Cede & Co.’s name, there was no real way to tell if individual shareholders’ shares were really in their accounts or not. All investors had was their broker’s word.

It wouldn’t be until late July that GameStop shareholders would circle back to what Dr. Trimbath had brought up in her Ask Me Anything. By direct registering their shares with GameStop’s transfer agent ComputerShare, investors could be certain that their shares were real, not being lent out to parties with conflicting interests, and legally in their name.

The hypothesis: As more shares became direct registered, fewer shares would be available to short sellers. If short selling adds artificial supply into circulation, direct registration of shares reduces real supply available for shorting.

Soon, the first of purple rings began popping up in feeds. Investors were taking their equities out of Cede & Co.’s name and registering them into their own.

Frequency escalated. Debate ensued.

But slowly, the sentiment of the subreddits changed. In early September, a share-counting bot was created to tally the number of direct registered shares based on posted screenshots of purple circles or of the documents sent by ComputerShare via mail. The bot has built-in protections against double counts and other forms of being gamed.

Relative to the market at large, GameStop has a fairly small number of shares outstanding at just under 76 million according to their latest SEC filing.

If there really are significantly more shares in circulation than were legitimately issued by the company, what would happen if investors were able to lock the float?

When investors direct register: Lessons from the past

There has never been a case of investors direct registering the total shares outstanding. But there has been a past attempt.

It didn’t end well.

Back in 2003, there was a company whose positioning in the market shared several characteristics with GameStop today.

CMKM, a diamond mining company, garnered significant attention online from individual traders. On Investor’s Hub, an early 2000s online forum where users discuss stocks, the CMKM board has over 355,000 posts, despite the fact that the stock has been delisted for almost 20 years. By comparison, Apple has fewer than 145,000. New posts continue to be published on CMKM’s forum almost daily.

Like GameStop, rumors of extraordinary amount of CMKM shares in circulation fanned hope for a short squeeze. Approximately 40,000 individual investors bought in and followed the company closely in online discussion boards. While the SEC’s investigation into the matter estimated that there were 620 billion more shares in circulation than the 800 billion formally issued by the company, many individual investors believed the real number to be much higher. Some even believed the total shares in circulation was in excess of three trillion.

CMKM individual investors believe the overextended supply was the product of short selling. They anticipated significant buy pressure would be created when the time came for these positions to be closed out.

When the company announced there would be a dividend issued to shareholders – but only if they held their shares in their own name – a mass number of CMKM shareholders pursued direct registration.

Retail is left holding the bag

The DTCC and the brokers that sold CMKM investors counterfeit shares realized that they could be forced into buying a large number of shares in tight liquidity as more shares were locked into direct registration. Brokers began blocking shareholders from being able to withdraw their certificates. Meanwhile, brokers were aggressively direct registering the shares into their own names while telling their account holders they couldn’t do so for them. Investors that failed to direct register their CMKM shares became known as the ‘Unshareholders.’

Hundreds of posts in message boards tell stories of individual CMKM investors waking up to the shares in their brokerage accounts simply being cancelled or sold for no money. In some particularly egregious cases, investors were even charged a fee for the sale. Their investment was simply gone.

In 2005, CMKM was delisted. With the cancellation of all counterfeit shares, the buying pressure that would have been generated by short covering had been snuffed out.

Though there have been arrests and successful lawsuits, CMKM investors have yet to receive any indemnification for their loss. Twenty years later, there are still active lawsuits relating to the CMKM mess.

GameStop is no CMKM

But other than the large individual investor base and mass wave of direct registrations by shareholders, GameStop has little in common with CMKM.

For one, GameStop is a real business. Investors know this – they can buy products from them online or visit a location in the mall.

CMKM…questionable.

The diamond mining company reportedly didn’t even have an office location. It was run out of the CEO’s Las Vegas home. Allegedly, CMKM did not engage in any revenue producing activities in 2004, the year before it was delisted.

By contrast, GameStop has billions in annual revenue. In its Q3 2021 earnings report, GameStop reported $1.3 billion in revenue, almost a 30% increase year over year – its third consecutive quarterly earnings expectations beat.

CMKM was a penny stock, making it high risk for bankruptcy and delisting.

At this point, GameStop is not likely to go bankrupt in the foreseeable future. The company has over $1 billion in cash on hand. This year, it secured several large-scale distribution centers to support its pivot to e-commerce. It has gone on a hiring spree, bringing in talent from prestigious companies, including executives from Amazon and Chewy.

CMKM’s delisting played a big role in investors getting left out cold. GameStop is far from being at-risk for delisting.

Moreover, CMKM itself defrauded investors. According to the SEC suit against the company, company insiders colluded with their transfer agent to continue selling shares beyond what the company had registered with the SEC.

The company’s general counsel, Brian Dvorak, was later irrevocably disbarred for writing 440 opinion letters to the transfer agent, certifying the unregistered shares the company fraudulently sold to investors. The insiders orchestrating the fraud knew there were billions, possibly trillions of counterfeit shares in circulation. Why not double down by setting off a short squeeze?

Company leadership announced a dividend for real shareholders. If the investor’s holdings were held in street name (i.e., in Cede & Co.’s name), they would not be eligible.

Ultimately, the FBI and Department of Justice got involved. Arrests were made.

InFidelity

On the morning of November 29,2021, GameStop individual investors woke up to betrayal. Fidelity, the broker that had absorbed a majority of Robinhood’s late-January exodus, listed almost 14 million GameStop shares as ‘available to borrow.’ Strangely, despite singlehandedly posting over 22% of GameStop’s total float as lendable, the security was labeled as ‘hard to borrow’ in Fidelity’s own interface.

GameStop individual investors were outraged. Where had Fidelity obtained this massive number of shares if they were not lending out their account holders’ shares?

Later that day, Fidelity updated the number to around 2 million, noting that the mysterious 11 million shares were an “overestimation” in its official response to complaints. A number of GameStop investors weren’t satisfied with this explanation.

Purple circle posts started to saturate r/Superstonk’s feeds, each getting thousands of upvotes, no matter how big or small the account.

A site tracking the information officially counted by the DRS bot registered tidal waves of new accounts coming in, some with less than $1,000, others with upwards of $1,000,000.

Direct registration starts to shed some light

As of right now, r/Superstonk’s direct registration bot has officially counted just over 1.1 million shares. That is the sum of approximately 8,300 confirmed posts of ComputerShare accounts and share count.

In its most recent earnings call, GameStop CEO Matt Furlong noted the number of shares with ComputerShare for the first time: 5.2 million shares as of October 30th, 2021.

“As always, we appreciate all the enthusiasm and support from our customers, employees, and stockholders who we believe are the best in the world,” he added.

Thousands of new accounts have been registered since October 30. Therefore, they are not reflected in the reported 5.2 million count. While none of the confirmed figures show individual investors the whole picture, they do put some rough notches in the bedpost.

Another interesting data point that has come out of the mass direct registration is an idea of how many GameStop individual investors there are.

GameStop investors noticed that the account numbers on ComputerShare certificates were in ascending, chronological order. ComputerShare account numbers could confirm a minimum number of individual investors. The highest ComputerShare account number (not counting the last digit) confirmed at least that many shareholders had registered, even if they hadn’t posted.

The share-counting bot’s sampled data calculates estimations of shares per account, an estimation that get better as its data set deepens.

Calibrating expectations

Considering the massive spike of trading activity in dark pools this year, individual investors have been at a gross information disadvantage when it comes to trading activity. They are only shown what big players want them to see. Meanwhile the big players get to see every move, and even influence the narrative. Is it still poker if one player has to show their hand?

As such, estimations of the total number of shares in circulation have varied from 140% of the float on the low end to one billion shares on the high end.

A billion shares in circulation is unlikely in light of the confirmed 5.2 million shares, even factoring in the October 30 cutoff date. With October 30 landing at essentially the mid point between the real beginnings of direct registration activity, it’s more likely that somewhere between 10–15 million shares are currently registered. While the number is still growing, that figure represents about 16-20% of shares outstanding – a long ways to go.

GameStop’s chairman Ryan Cohen, who invested in GameStop via his company RC Ventures, holds 9 million shares. The 5.2 million figure suggests that as of the record date, Cohen himself had not direct registered his holdings.

But purple rings continue to pour in, giving individual investors what they really need to understand the picture they have been deliberately cut out of: data points.

Uncharted territory

GameStop seems to have learned from the precedents of the past, gracefully sidestepping them and staying tight lipped, presumably to keep legal liabilities to an absolute minimum and company initiatives sabotage free.

What will happen if GameStop shareholders direct register all of the shares outstanding?

No one can say. It has never been done with a stock that wasn’t at acute risk of bankruptcy or delisting.

With bankruptcy off the table, a meaningful turnaround story in progress, improving balance sheets and earnings reports, and an all-star team, the confluence of events around GameStop trading activity has the potential make history.

For now, the only thing that is certain is that GameStop investors are setting precedents.

Just what that precedent will be remains to be seen.

 

*This article previously and erroneously identified Brian Dvorak as having received a promotion to a large brokerage firm after his role in the CMKM scandal. Upon follow up, it was discovered that Upside had falsely associated an unrelated person of the same name. Subsequently, we removed that part of the article on January 12, 2022, as it was untrue. We apologize for the error.