Jose Castillo pulled his $60,000 worth of GameStop Corp shares from his brokerage last summer, even though he had no intention of selling them.
Castillo traded GameStop shares without using borrowed funds, but he still feared his shares would be lent. Hedge funds short shares by borrowing and selling them, hoping they will drop in value so they can buy them back for less and pocket the difference. Financial market experts said the push towards direct registration was unlikely to curtail this practice, because most hedge funds’ collateral comes from prime brokers rather than retail brokerages.
Joshua Mitts, a securities law professor at Columbia Law School, said removing shares from the market makes them more susceptible to wild price swings, which could end up hurting the retail investors.
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