Trump Media & Technology Group is raising awareness among its shareholders regarding harmful trading practices in the stock market.
- Trump Media & Technology Group highlights steps for shareholders to prevent short selling by recalling shares or transferring them to the Direct Registration System (DRS).
- DRS offers increased control over investments, preventing illegal short trades by holding shares through transfer agents.
- DJT anticipates a short squeeze amid indicators of potential naked short selling, potentially leading to a significant rally in the stock price akin to past instances with GameStop and AMC Entertainment.
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TMTG on how to prevent naked shorting
After issuing a press release on April 23rd, alleging that Trump Media & Technology Group (DJT) stock was manipulated through the illegal practice of short selling known as “naked shorting” – the act of selling shares without first borrowing them and deemed difficult to locate – the company sent out a new press release on April 29th instructing shareholders on how to prevent it.
“(NASDAQ: DJT) (”TMTG” or the ‘Company’) is highlighting actions DJT shareholders can take to prevent the lending of their shares by brokerage firms for the purpose of short selling.
The Company’s shareholder base primarily consists of retail investors who hold their shares through various brokerage firms. Many of these retail shareholders invested in DJT because they support TMTG’s mission to create a free-speech beachhead against Big Tech censorship.
TMTG wants to clarify that if shares are currently on loan by brokerage firms to facilitate short selling, shareholders have the option of asking their broker to recall their shares.
After recalling their shares, long-term shareholders who believe in the Company’s future can then hold their DJT shares in a cash account, opt out of any securities lending programs, or move their shares to a Direct Registration (“DRS”) account at the Company’s transfer agent, Odyssey Transfer & Trust Company.”
According to TMTG, the significant rise in failures to deliver (FTDs) – instances where a trader fails to deliver the shares they’ve sold short within the established timeframe – has doubled the average for Trump Media shares before the merger. This notable increase in FTDs over the past few weeks led to DJT being placed on the Reg SHO list, where regulators tend to scrutinize the stock’s trading performance closely.
What is DRS and a transfer agent?
Typically, shareholders hold their shares in two standard ways: through a brokerage account or a bank account or via a certified physical stock holding company.
However, there’s a third option: holding shares through a transfer agent, which involves transferring purchased shares through the Direct Registration System (DRS). This method is entirely legal and endorsed by the Securities and Exchange Commission (SEC). Through the DRS, the transfer agent can maintain an electronic record of each shareholder’s shares.
With the DRS, shareholders have the choice to register their shares in their own name or in the name of the company’s transfer agent, unlike when holding shares with a broker, where the registration name is typically in the broker’s street name.
One of the main benefits of registering shares with a transfer agent is the increased autonomy and control over investments, leading to greater transparency in the custody process. This process is similar to having a physical certificate, but with the convenience of digital storage. However, it’s essential to remember that some transfer agents may charge fees for this type of transfer service.
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Why is DRS the best way to prevent illegal short trades?
Some shareholders believe that one of the best ways to protect against illegal short selling practices, such as “naked shorting,” is through the Direct Registration System (DRS) because transfer agents are unable to lend shares under their custody.
Three companies have a significant percentage of disclosed investors who have chosen to register their shares with DRS: GameStop, Dillard’s, and AMC Entertainment. One curiosity among them is the fact that all three gained a “meme stock” label in 2021 due to the high degree of short interest and high mobilization among investor shareholders on social media platforms.
In the case of GameStop, for example, currently, 25% of its outstanding shares are registered with a transfer agent. This, in theory, implies a limitation on the availability of loans to short sellers, thus limiting shorting activity on the stock.
Is DJT being a naked shorting victim?
There are several indicators that potentially reveal when a stock is being manipulated by illegal short selling practices. One such indicator is a very high level of short interest. According to data from April 15 provided by MorningStar, DJT’s short percentage of the float is about 8%. However, it’s essential to note that due to the company’s shareholding structure (with Donald Trump owning the vast majority of shares), only around 20% of the company’s float is available for trading by the general public.
This leads to another point: the high cost of borrowing. When there is a low availability of shares for borrowing and high demand for them, short sellers have to pay high fees. The latest data shows fees of 769% per year, an astronomical percentage considering that the average cost of borrowing for an average stock is 0.3% to 3% per year.
A cost of borrowing of over 700% could indeed explain a significant increase in Failures to Deliver (FTDs). When the cost of borrowing shares for short selling reaches such exorbitant levels, it indicates significant demand for those shares, likely driven by short sellers seeking to profit from a decline in the stock’s price.
In such situations, short sellers may struggle to borrow shares at reasonable rates, leading to a scenario where they either fail to find shares to borrow or are unwilling to pay the extremely high borrowing costs. This can result in an increase in FTDs as short sellers fail to deliver the borrowed shares within the required timeframe. FTDs of DJT reached 740 million at last check, a significant increase compared to 210 million on March 24 (pre-merger).
The mother of all short squeezes?
While it’s difficult to definitively determine whether DJT is a victim of naked short selling practices, the indicators strongly suggest this possibility. What is certain in this scenario for Trump Media stock is that a short squeeze is imminent.
According to short selling expert Ihor Dusaniwsky of S3 Partners, “If DJT starts rallying, you’re going to see the mother of all squeezes.” As DJT shares slowly climb back to their IPO debut price, this could trigger a rush by short sellers who fear they’ve made the wrong call to cover their positions, potentially causing a massive squeeze.
So, buckle up because the volatility shouldn’t stop there. Although DJT has a more limited float than “short squeeze protagonists” such as GameStop and AMC a few years ago, it faces similarly strong demand for shorting and borrowing. This undoubtedly adds extra risk for those betting against the stock based on its fundamentals.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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