‘Experts’ Warn Against Direct Stock Registration – Who Can Retail Trust?

Traditional stock brokers have warned retail investors over the direct registration of shares using shoring up options. Meme stock traders have continued to avoid traditional stock brokers by instead registering stock ownership via Computershare.

Retail argues that this action helps to protect them from short selling. However, brokerages say the activity only exposes these investors to increased volatility risk as fewer shares are available for trading.

Growth of FAST Agents

FAST (Fast Automated Securities Transfer)  agents like Computershare that allow stockholders to gain total ownership of their stocks have continued to grow in prominence. Trading restrictions placed on GameStop shares by companies like Robinhood in January have caused retail investors to distrust brokers.

Many believe that the bans were made to protect hedge funds that had lost billions of dollars shorting stocks. These funds did not foresee a Reddit-fueled rally against them.

Trying to avoid short-selling problems, these stockholders have turned to stock transfer companies to pull out their shares from brokerages. Preferring to register their names directly onto the company’s share register instead of the traditional system used with stockbrokers. 

This new movement became popular recently following the MOASS (Mother Of All Short Squeezes) trend made familiar by Redditors. Retail investors have banded together to battle hedge funds that borrow shares and short them to repurchase them to make a profit.

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Stock Brokers Warn Against Direct Registration

Industry specialists have warned that the practice of direct registration is unlikely to curb short-selling. Instead, they believe it makes retail investors more susceptible to volatility due to fewer shares on the market which can hurt them.

Ihor Dusaniwsky, managing director of research firm S3 Partners, reiterated the sentiment mentioned above. He posited that collateral used by hedge funds comes from prime brokers and not retail brokerages; hence hedge funds cannot stop short-selling. He said,

“The shares used to stock-loan from margined retail accounts are minimal compared to the stock-loan inventory from prime brokers and long lenders such as mutual funds and pension fund,”

Another expert, Joshua Mitts, a securities law professor at Columbia Law School, also holds a similar opinion on pulling stocks away from brokers:

“From a psychological point of view, I can see how that resonates. But from an economic point of view, it does not make much sense, because, with fewer shares available, the trading is simply going to become more volatile,” 

Despite these experts’ opinions, the investors’ concerns about their shares borrowed and used for a short-sell cannot be overlooked. Also, the outlook on the mainstream media’s seeming support for Wall Street should not be treated lightly.

It appears as though, despite regulatory agencies created to ‘protect’ retail investors, the road to where they should go – and who they should trust – only gets more difficult to find.

Do you think retail investors should continue to pull out their stocks off brokerage platforms? Let us know in the comments below.