Reddit Users Has Found a New Tactic in the War Against Wall Street: Cutting Brokers Out Altogether

Reddit Users Has Found a New Tactic in the War Against Wall Street: Cutting Brokers Out Altogether

A long-running trend among individual investors came to a climax on Thursday, with numerous meme stocks ending the day burning.

Since being booted out of January's short squeeze by online brokers seeking to avoid margin calls, retail investors have been hunting for a solution to their multi-front attack on short selling hedge funds, and they appear to have found it after months of research.

Completely eliminating the brokers

An increasing number of retail investors have abandoned their pitchforks, torches, and TD Ameritrade accounts in favor of direct registration platforms like Computershare, which have seen a rise in revenue from the meme community.

Users on Reddit filled message boards with screenshots purporting to show that they had transferred their trading accounts to transfer agents, which let them directly own shares in a firm rather than via the more common 'street' ownership. A broker frequently retains an investor's shares on its books and keeps track of your ownership of the asset without the broker or the individual ever physically holding the shares.

Of course, indirect ownership has its benefits.

However, the trend toward direct registration—in some ways, the equivalent of a Gen Xer's late-teen child discovering their Sony DiscMan hidden in an old briefcase and deciding that this was the pinnacle of music technology—began just a few weeks ago, when self-described 'Apes' realized that using zero-commission trading apps didn't mean they were buying stock in a company, but rather paying a broker to hold their stock via a "street" account.

"We've witnessed a big rise in direct registration transactions in several U.S.-listed 'meme-stocks' in the last few weeks," Paul Conn, president of Computershare's Global Capital Markets, told MarketWatch's MemeMoney.

"Retail investors have requested their broker or bank to move their interests out of the "street name" system and into the company's share register, which Computershare manages as agent for the relevant firm."

Computershare refuses to offer specific figures on the magnitude of the inflows it saw. If photos of what they describe as freshly active accounts uploaded to Reddit are any indication of interest, the Abbotsford, Australia transfer firm is seeing a constant stream of new business.

"There are a lot of benefits to direct registration, including the opportunity to receive dividends and other business communications directly from the corporation," says Conn.

"Registered investors also receive their proxy and have the opportunity to attend a company's shareholder meeting, ask questions, and vote in person." "Another benefit is the opportunity to instantly transfer ownership," he noted.

Direct registration in meme stocks, on the other hand, has another significant benefit for Reddit's retail Apes: it prevents brokers, short sellers, and market makers from creating a situation in which the number of shares sold short in any given business exceeds the total number of shares outstanding. Naked shorting, in which investors profit from stock bets without actually owning the stock, is illegal on Wall Street, but many Redditors believe it is alive and well, thanks in part to indirect ownership. Short bets are inherently risky since a wrongway gamble might result in a never-ending loss.

"When the music stops, there aren't enough shares to go around," said Susanne Trimbath, CEO of STP Advisory Services and an economist who has helped educate ordinary investors on market structure.

"These inexperienced investors are attempting to stop the music."

The music was still playing on Thursday, and it provided a good melody for some meme stocks.

"These inexperienced investors are attempting to stop the music."

The music was still playing on Thursday, and it provided a good melody for some meme stocks.

BlackBerry, Clover Health, and Palantir all ended the day higher, as did AMC (which appeared to finally profit from the #AMCSqueeze trending on Twitter).

"This buying spree is among the brokers," Trimbath wondered. "At this point, it's easier to come up with money than it is to come up with shares."

Many retail investors agreed, and they used memes to draw attention to their disruption.

Despite a strong start, GameStop shares fell 0.02 percent on Thursday.

It is important to note that direct registration is not a panacea for all market structure issues.

Importantly, although direct registration may put more pressure on short sellers, it also puts Apes at risk of large losses if the stock drops sharply.