The ongoing GameStop short squeeze has continued into the seventh month of July, confounding many folks in the mainstream media. The massive appreciation in GME shares has given GameStop the ability to get out of long-term debt and position themselves for a material transformation towards online sales. Times are materially better for the company, and many shareholders are still up. However, it's not all peaches and puppy butts for GME longs, as the stock has dropped over $150/share in the last month. Instead of just sitting by and shaking your fist at a computer monitor or cursing Citadel Securities, we thought we would provide some advice for how the movement can do a better job of fighting short seller attacks. This article will break down how you can prevent your shares from being lent to short sellers.
Before we break down exactly how to make sure your GME shares aren't being lent to short sellers, it is important to cover some very important concepts. Let's get started!
What is the difference between a margin and cash account?
A margin account is a brokerage account. The broker lends cash to the customer in order to buy financial products such as stocks. The loan is collateralized by cash and securities in the account and customers are charged interest on it. A margin account owner who uses leverage (trades on borrowed money) opens themself to bigger profits and losses.
Margin account holders have to keep their account's total equity over the margin maintenance level, and if it dips below that their broker will issue a margin call. The investor will have to raise the required amount of equity or cash in a specified period (usually three days). Investors can be sued by their brokerage firm for failure to deposit more cash in the event of a margin call.
A cash account is a lot more simple than a margin account. Short selling and trading on margin are prohibited in cash accounts. A cash brokerage account requires that all transactions be paid for in settled cash. For most stock trades, settlement occurs two business days after the order executes. Meaning cash accounts need to have cash available on the day of the settlement. This makes day trading cash accounts a difficult task, but that is a topic for another day.
The most important takeaways here should be that cash accounts do not involve borrowed money or the ability to short stocks. Customers with margin accounts do open themselves up to their shares being lent to short sellers, but that depends on the practices of the broker or custodian.
What is a Fully Paid Lending Program?
Several brokers have Fully Paid Lending Programs that customers with margin accounts can choose to opt in or out of. A Fully Paid Lending Program allows customers to make additional income off of securities that they own. If enrolled to such a program, your broker is able to fully borrow shares from your account to lend to a short seller. In return, you can receive some profits from the interest fees collected by your broker. You still retain voting rights on the shares you own, even if they have been lent out, and you can sell them at any time. This program usually focuses on "hard-to-borrow" stocks like GameStop.
I contacted E*TRADE, my broker, about their program, and they let me know that I am not signed up for the Fully Paid Lending Program even though I have a margin account. This isn't the case at every broker or custodian, so it is very important for you to contact them directly to find out their specific policy.
There is a great post from u/CalamariAce on r/WallStreetBets that breaks down a bunch of different brokers who use Fully Paid Lending programs. We highly recommend checking out the post to see if your broker is on the list.
How to stop your broker from lending your shares to short sellers
We've made it to the main event of this article. Sadly, the answer is a bit more nuanced than some of my fellow r/SuperStonk or r/WSB traders may realize. Recent data indicates that between the GME meme rebellion movement and Ryan Cohen's stake in GME, Reddit has taken over the majority of the share float. That's great, but it could be better if everyone made their shares unavailable to borrow. That is how the short squeeze can really intensify. So here's some ways to get this done:
- Switch from a margin account to a cash account
- Simple enough, but you will no longer be able to trade options or buy securities with borrowed money
- Your stocks will not be lent to shorts in most cases
- Confirm with your broker that you are not participating in their Fully Paid Lending Program
- Some brokers will slip margin accounts into this program on the sly, so be sure to call your broker and let them know you want no part of this
- Downgrade your Robinhood account from Robinhood Instant or Robinhood Gold to Robinhood Cash
- So many of you jaboofers are still trading with Robinhood, which is baffling after how they have treated customers in 2021, but please downgrade your account if you want to be a good soldier
- Better option is to leave Robinhood altogether for a better broker
Why this matters so much
The short selling margin maintenance requirement for GME is currently 800% at E*TRADE and it appears to be at a similar level across the brokerage industry. This is insanely high. It means that for each dollar a hedge fund is short GME with, they need to have 8 dollars of collateral. This could be worse, so let's make it so! If all of the GME longs in the rebellion actually pull our shares out of the available pool for shorts, things will get materially worse. That's what we are here for, right? The mother of all short squeezes?
Sitting on your hands and doing nothing while short ladder attacks hit the stock is one way to go about it, but if you want to fight back, consider doing the needful for the movement and prevent your shares from being lent. There are obviously things to consider before going this route, but this is the way if you really want to put the screws to hedge funds who are short GameStop stock.
Please be sure to check out Investopedia.com for a more detailed breakdown of all of the concepts in this article. They are a great and free resource for investors who are still learning the ropes.
This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.
At the time of this article, Shacknews primary shareholder Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long GameStop via GME shares
Long GameStop via GME call options