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Why Micro-Cap Companies Are Joining GameStop in the Fight Against Naked Short Sellers

One Singapore-based micro-cap watched its shares skyrocket more than 1,000% after it took steps to investigate naked short selling. Here's what you need to know.
  • Genius Group is a micro-cap company whose stock jumped more than 1,000% during the first few weeks of this year.
  • Suspicious of trading irregularities regarding Genius shares, the company's CEO, Roger Hamilton, has launched an investigation into alleged naked short-selling activity.
  • Naked short selling is a widely debated issue among investors who have witnessed unconventional trading activities in stocks such as GameStop.
Figure 1: Why Micro-Cap Companies Are Joining GameStop in the Fight Against Naked Short Sellers

Figure 1: Why Micro-Cap Companies Are Joining GameStop in the Fight Against Naked Short Sellers

Read also: What Job Cuts Could Mean For GameStop Stock

Why Genius Group Is Fighting Naked Short Selling

Genius Group  (GNS) , a Singapore-based company with a market cap of nearly $70 million, has watched its stock skyrocket by more than 1,000% year to date.

One of the reasons behind the massive share price surge is the news that the company's CEO, Roger Hamilton, appointed a former FBI director to investigate alleged illegal trades in Genius shares.

As Hamilton revealed in an interview with MarketWatch, the company's float has only 10.9 million shares. But he suspects that traders are engaged in naked short selling — which involves selling a stock short without having first properly borrowed the shares to be sold.

On his Twitter account, Genius’ CEO commented on his suspicions that short sellers have been messing around with his company's shares:

Genius also claims to have evidence of naked short selling from ShareIntel, a software-as-a-service (SAAS) platform that provides public companies with access to shareholder position movement and settlement data.

Apparently, ShareIntel's info indicates that many individuals failed to deliver a significant amount of shares as part of a scheme to interfere with the company's share price.

The illegal practice of naked shorting implies that there is more short pressure on a stock than the number of shares available for trading.

Seeing a high level of delivery failures from short sellers to buyers within the settlement period can be evidence of naked short activity.

Genius Isn't the Only Company Fighting Naked Shorts

Another micro-cap company, Creatd  (CRTD) - Get Free Report, which acts as a holding company in the communications industry and is headed by Jeremy Frommer, announced late last year that it would be partnering with ShareIntel to protect its shareholders from naked short selling.

According to Frommer, it's necessary to take a closer look if a company and its underlying stock are being targeted by this illegal practice. Furthermore, the CEO promised to escalate this topic to the top level in the financial markets.

"I intend on escalating this issue to the highest levels of the financial services industry to protect the integrity of the capital markets, especially the more vulnerable entrepreneurial, growth-oriented stocks," said Creatd's CEO.

Naked Short Selling in GameStop Stock

Many GameStop shareholders have long urged for greater transparency in the markets. And with their holdings being allegedly harmed by practices such as naked short selling, it's not hard to see why.

One of the reasons GameStop investors are skeptical about this issue is because of the high number of failures to deliver in the company's recent past.

In September 2020, GameStop first appeared on the threshold list for failures to deliver — also known as Regulation SHO. It returned to the list for 39 days between December and February 2021, with millions of shares failing to be delivered.

Stocks on the Regulation SHO list have to have had their transactions unsettled for five consecutive settlement days. And settlement failures are generally associated with naked shorting practices.

However, it is worth noting that there are indeed legitimate reasons that a stock may fail to deliver a trade, such as human error or system crashes.

One of the initiatives that GameStop shareholders have used to get rid of short-selling activity and possible wrongdoing by traders is registering their shares through a transfer agent, instead of holding them with a broker house.

Unlike brokers, transfer agents cannot make shares available for lending, so short sellers end up having less access to GameStop shares in the borrowing market.

According to GameStop's quarterly filings, there are about 71.8 million shares, which comprises about 30% of the company's total float. 

(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. Thanks for supporting Wall Street Memes)