Some people in the U.S. are extorting memes from brokerages

Some people in the U.S. are extorting memes from brokerages ...

Dec 22 - Jose Castillo withdrawn his $60,000 worth of GameStop Corp shares last summer from his brokerage, but hadn't planned to sell them.

The 26-year-old research expert lives in the greater Minneapolis area. He's among a growing number of investors that buy'meme' stocks - especially in day trades who take their own risk. Because of the uncertainty, the money made by hedge funds is going to be lent to short-sellers.

Castillo pulled the shares of Fidelity Investments and moved them to his name using Computershare Ltd., an Australian stock transfer company.

Brokerages tried toreassure investors that they don't lend shares only of customers who're trading on borrowed funds. If they use their cash, there's no loan.

Castillo traded gameStop stock without using borrowed funds but he still feared his shares would be lent.

He said he read about the direct registration of a shares in Reddit, the social media platform that day traders turned to this year after the meme stock trading frenzy began. Then, more investors announced that they have taken the shares out of brokerages, and they say it is helping them to save a short-selling relationship.

"There's a lot of work going on with a stock being shorted, people began to think about how to make sure I own it and nobody else does anything I do with it," Castillo said in a interview.

The Fidelity spokesperson declined to comment.

Paul Conn said he saw a wave of direct registration beginning in September and was driven by day traders.

"Retail investors asked their broker or bank to remove their investments from the "street name" system and onto its own currency, directly onto the company's share register," said Conn.

The rise in the buck's price compared to the money we make, say Financial Market experts. They believe that a direct registration effort won't hinder that practice, since some hedge funds' collateral comes from principal investors rather than retail firms.

The share used from margined retail accounts is cheap compared to the stock-loan inventory from prime brokers and long lenders such as mutual funds and pension funds.

According to Refinitiv, monthly average trade volumes of GameStop shares have dropped since July to their lowest level in over a year. That was about the time that Reddit users started to advocate for the direct registration of the shares.

What is the more shares transfer out of brokerages to direct registration providers such as Computershare? The fewer of them are available to trade. Joshua Mitts said removing shares from the market can be dangerous for the retail investors.

It would seem that if someone were more interested, the trading could have been faster, Mitts said.

GameStop's spokesperson declined to comment.

Popular trading apps like Robinhood Markets and SoFi Technologies in particular would lose out if the direct registration trend intensified. They benefited from this year's surge in meme stocks.

In response to Robinhood and Charles Schwab representatives said that only shares of customers who borrowed money from the brokerages to invest are loaned to hedge funds.

"We've seen an uptick in recent months in client requests to hold certain securities outside Charles Schwab, as a means to avoid the lent-out," said a company managing director of trade and education, Jeff Chiappetta.

Many requests were made by a couple of clients who bought shares without borrowing from Charles Schwab and wouldn't have lent their shares, Chiappetta said.

A spokesperson for SoFi didn't respond to a comment request.


Retail investors began mistrusting brokerages with the introduction of trading restrictions in late January on GameStop shares. A Thousands of investors claimed the trading curbs were introduced in order to protect hedge funds that lost billions of dollars shorting the stock without anticipating a Reddit-fueled rally.

Trades like Robinhood depend on the payment of order orders under which they receive fees from the market makers to route their trades to them. This business model also made retail investors suspicious, especially since Citadel Securities (that acts as Robinhood's market maker) has also run hedge funds that use short-selling to sell money.

Robinhood and Citadel insisted that the trading restrictions weren't put in place to protect hedge funds, but were necessary because Robinhood didn't have enough collateral to execute customer orders.

Last month a US judge sided with the matter, claiming that the trading app and other brokerages sunk the risk of harming retail investors to buy more "meme-markets" for the wrong amount and triggering the sold-off.

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