What is DRS & can it help GME investors take on Wall Street?
If you’ve been scrolling through any meme stock forums, you would have noticed a huge movement among retail investors who are moving their stock holdings from online brokerage firms to DRS, and strongly encouraging their fellow shareholders to do the same.
Holders of meme stocks, in particular GameStop Corp. (NYSE: GME), have rallied against Wall Street and large hedge funds after unscrupulous practices and alleged market manipulation surrounded the epic GME short squeeze of 2021.
The short squeeze saw the GME share price hit an intra-day high of $483 (pre-split) on January 28.
It was trading around $17 earlier in the month.
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But many believe the power of Wall Street intervened to prematurely end the carnage that short selling hedge funds were experiencing as retail investors took control… and the gains.
Online brokerages, including Robinhood, made the extraordinary decision to temporarily remove the BUY button on stocks such as GME during the mania, preventing the short squeeze from being extended further.
Unfounded allegations of collusion between brokerages and hedge funds who were short GME, were rife.
The basis for the collusion allegations was the fact many brokerages make millions from hedge funds and other financial institutions by providing order flow information, known as market maker fees.
So what has DRS go to do with all of this?
What is DRS?
DRS stands for Direct Registration System. The systems provides a shareholder direct ownership of a company’s stock via a transfer agent assigned by the company to administer its financial records and investor accounts. This is opposed to the far more common practice of holding shares ‘in street name’ via a brokerage, where the stock is registered in the broker’s name and the broker internally assigns ownership rights to the investor.
While not the most common method of owning shares, DRS is nothing new.
Many investors with large stock portfolios choose to directly register their holdings in order to have full voting rights and reduce any risk of brokerages going bust. The DRS system is also used in the process of executing employee share schemes and dividend reinvestment plans.
However, never has there been so much interest in it amongst meme stock investors.
Related: Stonk-O-Tracker Explained: A helpful resource for AMC, GME and BBBY investors
What’s behind the DRS GME movement
While the brokerage ownership system is highly regulated and has functioned well for decades – even playing a role in democratizing access to the stock market – skepticism has emerged, particularly amongst the GME faithful.
This has not only been a consequence of those controversial affairs during the 2021 GME short squeeze (mentioned earlier), but also because of the fact shares held by brokerages are often lent to hedge funds to be sold short.
Enabling institutions to short your long position
Econiomst, Asger Bruhn explains this in a Medium article titled, Robinhood Lends “Your” Shares to Short Sellers (and Keeps All the Proceeds). Here’s a key extract:
“When the WSB community hoards GameStop shares on margin accounts, Robinhood holds a large amount of shares at its account with the Depository Trust & Clearing Corporation (DTCC, the organisation responsible for clearing equity markets). Investors using Robinhood have agreed to let Robinhood lend the shares.
“With high demand for shares to lent and a low float of shares, Robinhood make premium bucks renting the shares “bought” by the WSB community to those hedge funds and other agents wanting to short GameStop.
“Further, Robinhood clients have accepted that Robinhood keeps all the proceeds from lending shares. Many other brokers (mainly the prime brokers) share the proceeds from lending with the client. There’s a saying in business: ‘When you aren’t paying, you’re the product’. For Robinhood, this is indeed the case.”
So in a sense, by buying and holding their GME shares using brokerages such as Robinhood, the devoted holders are in fact enabling the very thing they fundamentally despise – short selling hedge funds trying to starve companies of capital and ultimately destroy them.
The practice of lending shares also creates additional counterparty risk.
This is the risk that a borrower of shares (a hedge fund, for example) defaults and can’t meet its contractual obligations to the broker, leading to major flow-on effects.
In the worst case scenario, the brokerage could collapse. When brokerages collapse there are some U.S. Government guarantees protecting shareholders, but all funds are not guaranteed.
Another major factor behind the DRS movement is the significant speculation over the past year that GME will pay a tokenised or NFT dividend.
In this event, major mainstream brokerages have indicated they can not guarantee delivery.
This is what Fidelity says about cryptocurrency dividends.
“Fidelity’s platform currently does not support holding cryptocurrencies or receiving dividends in the form of cryptocurrency. If a company issues a dividend in the form of cryptocurrency, then other arrangements would need to be made in order to receive the dividend.“
So, in summary there are three key reasons why the GME DRS movement is taking off.
- To have full direct ownership rights and maintain the ability to buy and sell shares during another major short squeeze.
- To protect against counterparty risk and stop their shares being used to short the company they’re invested in.
- To secure rights to any future tokenised dividend.
- As a protest move against the likes of Robinhood who left a bad taste in investors’ mouths after the 2021 short squeeze.
Could the DRS GME movement increase the ferocity of another short squeeze?
In theory, yes. This could indeed be a 5th (and most important to some) reason for transferring GME shares to DRS.
With more shares held via DRS, there is less in the open market.
This means less shares for shorters to borrow in order to try to manipulate the share price downwards, and it also creates vulnerabilities for shorters when seeking to cover positions in the midst of a short squeeze.
However, some experts have argued the likelihood of a major short squeeze could actually be reduced by the DRS movement. This is because many hedge funds may simply look elsewhere for short targets should a disproportionately large number of GME shares be held through DRS – still not a bad outcome for long-term investors.
How GME investors are moving to DRS
The process is done through GME’s transfer agent, Computershare.
It’s pretty simple and step-by-step guides are being shared by GME investors on forums such as Reddit, where investors are also encouraging each other to share screenshots of their Computershare accounts.
So far, an unprecedented number of GME shares are being transferred to DRS via Computershare.
According to GME’s latest Form 10-Q, just over over 20 million shares were transferred to DRS in the three months to July 30. No other company in the U.S. has ever reported the same rapid increase in DRS uptake.
As at July 30, GME reported 71.3 million of its shares are held directly through the DRS. That around 30% of all issued shares. This number is expected to keep rapidly growing in the coming months as momentum around the Reddit-fuelled campaigned continues to gain traction.
Any major impacts of the DRS GME movement are yet to be seen, but there are many spectators watching closely as there’s simply no past precedent to be guided by.