What’s happening with GameStop, and probable cause for the buy button to be shut off in January of 2021 has to do with 3 main factors:
A kind of short selling known as naked short selling (short selling without first finding a stock to borrow), 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, who lends it to someone else, who then lends it back to the borrower again, who can use 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 is allowed to fail-to-deliver and the borrower is told they have 35 days to go get a share to deliver. Then, the share 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."
- Susanne Trimbath, author of Naked, Short and Greedy
Current status of the GME float
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 304 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.
Since retail investors learned about this secret weapon against corruption last year, they began direct registering (transferring their shares from brokers to the Direct Registration System) back in September 2021. As of March 22nd 2023. 76 million shareshave been direct registered, or “locked”. This equates to 25% of the entire company.
Data sources:
All 304 million shares being direct 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 those for which Bill Hwang of Archegos is currently under investigation. Once all 304 million shares are registered to individual investors at Computershare, there is no longer any plausible deniability of the exploitation of the rules by market makers and hedge funds. This will force them to “close” their positions by buying back each and every entitlement they sold, 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 there is 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