Electronic trading in stock shares and bonds are facilitated via depository transfer check (DTC), which serves as the repository and record-keeping clearinghouse for negotiable securities. However, there are circumstances when shares or bonds are held in physical certificate form, i.e. custody-only trading.
Often, in the past, people would buy and hold the certificates with the intention of passing them down to heirs in their wills. Early buyers of Walt Disney Co. stock often framed their certificates, which were inscribed with a photo of Walt Disney surrounded by Mickey Mouse, Donald Duck, and other beloved characters. These have since become collectibles, with a certificate for a single share of stock worth a few hundred dollars.
The other reason to keep securities in physical certificate form is to prevent illegal short selling, which still is practiced regularly in spite of a 2008 SEC ban. The unavailability or limited supply of stock that can be “loaned” for legitimate short sales allows for companies to forensically track which market makers may be in violation. This is a tactic that Pink Sheet and small cap public companies may need to deploy to avoid predatory speculation and manipulation of stock prices by market makers.
True story: a Market Maker naked shorted about 20,000 shares of stock at $2. It subsequently dropped to about $0.65, where it stayed for over 9 months. The Market Maker had a $27,000 positive carry on his P&L for so long that he forgot to follow the position for news. One day he saw that he had a -$10,000 position, and was shocked to see the stock at $2.50. There had been a tender offer to go private, and 94% of the stock had been purchased. The Market Maker had to bid on the Street and try to locate any shareholders without stock in Street Name, i.e. certificate form. Every electronic purchase of 10 shares increased the price by 25-50 cents. They wound up paying an average of over $38 per share, after finding several certificate owners to sell to them to cover the rest of the short. Expensive lesson, but the alternative could have been to possibly lose their NASD trading authorization.
Related or Semi-related Video
Finance: What is Power Of Attorney (Trad...2 Views
What is power of attorney?
alright well little old Maybelle blue hair just can't think straight anymore
at least when it comes to managing her considerable volumes of money husband [kitchen oven on fire]
number four was loaded and had a weak heart and well he ate one too many [tombstone and grave]
cheeseburgers Maybelle trusts her grand nephew
Beauregard to make trades on her behalf and has given him trading authorization
to manage her account that is he can make trades without pre-clearing each [Maybelle carries brownie trays]
one with her his status is analogous to having power of attorney in doing
various legal and financial things in life like you might sign over power of
attorney to your legalese proficient uncle to handle negotiating the terms of
your juggling contract because well with your busy schedule you need some help [hand signing power of attorney papers]
keeping all your you know balls in the air and you have the option between
granting general or limited power of attorney like if you want your uncle to
handle all of your finances general POA makes sense but if you only want him to
handle your contracts like in a specific narrow area like at this brokerage
account only with equities or dead or something like that well then a limited
POA would be more appropriate so ya trading Authority is the Wall Street
e-version of power of attorney you might really want to put a few grand into the
stock market but as far as you know the stock market is just a market where they
keep produce you know stocked so you turn over authority to make the actual [Maybelle at the food market]
decisions and perform the actual trades to someone you trust to you know more [Maybelle brings food bag home]
efficiently handle your money because if everything's left up to little old miss
blue hair her entire life savings could end up invested in sweaters for cats Inc [Maybelle dresses her cat in a sweater]
Up Next
What does it mean to have fiduciary obligation? To have a fiduciary obligation means that a third party has been given the trust and responsibility...
An omnibus account is an investment account in which a collection of investors have invested their capital to own a pro rata share of that cooperat...
What is an Agency Relationship? An agency relationship allows an agent to act on behalf of the individual or company who hires them. This type of r...