You don't really own the shares you think you own
October 24, 2008 6:30 AM Subscribe
All the stocks and bonds you think you own are actually owned by a company you've probably never heard of, a company owned by the same people who own the US Federal Reserve.
Originally paper stocks certificates were issued as evidence of ownership by companies to investors purchasing shares. But as trading volume exploded in the late 60's this manual system didn't scale. As an increasing number of trades failed due to paper processing backlogs The New York Stock Exchange took the unprecedented steps of closing on Wednesdays in 1968. [.pdf]
In response to the crisis The Central Certificate Service (CCS) was created to electronically settle trades and eliminate the need for share certificates. Although intended as a temporary measure, it is still with us.
Financial assets purchased today aren't registered in your name; rather they are held in what's known as street name. Regardless of the assets purchased or the broker used, this name is almost always a successor of CCS, namely The Depository Trust & Clearing Corporation (DTC), or some anomalous sounding variant of "Cede & Co".
Holding assets in excess of $40T (yes, trillion), DTC is the single largest private trust in the world - in fact the largest company you've probably never heard of.
While DTC no doubt provides a critical service - standing behind and insuring the performance of hundreds of thousands of broker / dealers, institutional investors, banks, mutual funds, insurance companies and hedge funds, many people are critical of this quasi-monopoly. While some say a system like DTC facilitates short selling, and and other forms of market manipulation, others claim the interests of American shareholders have been superceded by this system of indirect stock ownership, and the technology now exists to revert to direct ownership of stocks [.pdf].
But, as the business of big business is indeed, big business, whether or not these temporary measures will ever be removed is anyones guess.
Originally paper stocks certificates were issued as evidence of ownership by companies to investors purchasing shares. But as trading volume exploded in the late 60's this manual system didn't scale. As an increasing number of trades failed due to paper processing backlogs The New York Stock Exchange took the unprecedented steps of closing on Wednesdays in 1968. [.pdf]
In response to the crisis The Central Certificate Service (CCS) was created to electronically settle trades and eliminate the need for share certificates. Although intended as a temporary measure, it is still with us.
Financial assets purchased today aren't registered in your name; rather they are held in what's known as street name. Regardless of the assets purchased or the broker used, this name is almost always a successor of CCS, namely The Depository Trust & Clearing Corporation (DTC), or some anomalous sounding variant of "Cede & Co".
Holding assets in excess of $40T (yes, trillion), DTC is the single largest private trust in the world - in fact the largest company you've probably never heard of.
While DTC no doubt provides a critical service - standing behind and insuring the performance of hundreds of thousands of broker / dealers, institutional investors, banks, mutual funds, insurance companies and hedge funds, many people are critical of this quasi-monopoly. While some say a system like DTC facilitates short selling, and and other forms of market manipulation, others claim the interests of American shareholders have been superceded by this system of indirect stock ownership, and the technology now exists to revert to direct ownership of stocks [.pdf].
But, as the business of big business is indeed, big business, whether or not these temporary measures will ever be removed is anyones guess.
Mutant, you just made me very, very afraid.
posted by cimbrog at 6:36 AM on October 24, 2008 [1 favorite]
posted by cimbrog at 6:36 AM on October 24, 2008 [1 favorite]
Mutant, I have a lot of respect, but this is a bit alarmist. There is no reason to be suspicious of market makers...
posted by bystander at 6:37 AM on October 24, 2008 [4 favorites]
posted by bystander at 6:37 AM on October 24, 2008 [4 favorites]
All the stocks and bonds you think you own are actually owned by a company you've probably never heard of
is there a webcam across the street i can use to monitor if people are jumping off?
posted by pyramid termite at 6:40 AM on October 24, 2008 [1 favorite]
is there a webcam across the street i can use to monitor if people are jumping off?
posted by pyramid termite at 6:40 AM on October 24, 2008 [1 favorite]
To put it another way, why are you making this post? Are you suggesting there is a solvency issue (which, as I understand it, is not possible). I mean, I would like a nice paper stock certificate as much as the next man, but we have all agreed on paperless equities trasactions; right?
posted by bystander at 6:43 AM on October 24, 2008
posted by bystander at 6:43 AM on October 24, 2008
Oh way to go Mutant, you just made the Dow plunge 5%. Thanks a lot.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:45 AM on October 24, 2008 [19 favorites]
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:45 AM on October 24, 2008 [19 favorites]
There is no reason to be suspicious of market makers
There is reason to be suspicious, or at least skeptical, of everybody and everything.
I'm a complete naif, if that's the word I want, when it comes to financial crap, but I thought you could have your "real" certificates sent to you. Suitable for framing.
posted by DU at 6:48 AM on October 24, 2008 [1 favorite]
There is reason to be suspicious, or at least skeptical, of everybody and everything.
I'm a complete naif, if that's the word I want, when it comes to financial crap, but I thought you could have your "real" certificates sent to you. Suitable for framing.
posted by DU at 6:48 AM on October 24, 2008 [1 favorite]
.
posted by bonobothegreat at 6:56 AM on October 24, 2008
posted by bonobothegreat at 6:56 AM on October 24, 2008
bystander -- "To put it another way, why are you making this post? Are you suggesting there is a solvency issue (which, as I understand it, is not possible). I mean, I would like a nice paper stock certificate as much as the next man, but we have all agreed on paperless equities trasactions; right?"
Ah great question. No, I don't think there is a solvency problem. But I'm old enough to remember when the NYSE closed on Wednesdays. I was only a kid, but this problem and solution stuck with me.
About ten years ago I noticed that it was getting increasingly difficult to have my own shares listed in my name, not street name. This troubled me, as when I use my capital to purchase shares I'm doing it for one and precisely ONE reason - I'm bullish. I think that company and those shares are headed in ONE direction - UP.
But when I can't register my shares in my name, whomever is holding those shares can lend them out, WITHOUT my permission. So that entity is not only profiting on my shares, but the entity who borrowed them has opposing interests to my own.
In other words, the existing system of indirect ownership, which was (as per the Time article of 1968 I linked to) a temporary system, facilitates interests that are counter to my own as a long. Before DTC (and CCS) a short would have find a willing long. At times that was perhaps difficult. Indirect share ownership makes this ridiculously easy. And also makes other forms of market manipulation easier as well.
I certainly didn't intend this to come across as alarmist and I don't really see it in the text, but I do think since we're all talking about rejiggering that global financial system of ours, it's time for the question of indirect share ownership - which most people just DON'T know about - to be revisited.
It was a temporary measure, and it would seem that now we've got the technology. But migrating to such a system would, no doubt, be expensive, so its not clear if this will ever change.
posted by Mutant at 6:57 AM on October 24, 2008 [20 favorites]
Ah great question. No, I don't think there is a solvency problem. But I'm old enough to remember when the NYSE closed on Wednesdays. I was only a kid, but this problem and solution stuck with me.
About ten years ago I noticed that it was getting increasingly difficult to have my own shares listed in my name, not street name. This troubled me, as when I use my capital to purchase shares I'm doing it for one and precisely ONE reason - I'm bullish. I think that company and those shares are headed in ONE direction - UP.
But when I can't register my shares in my name, whomever is holding those shares can lend them out, WITHOUT my permission. So that entity is not only profiting on my shares, but the entity who borrowed them has opposing interests to my own.
In other words, the existing system of indirect ownership, which was (as per the Time article of 1968 I linked to) a temporary system, facilitates interests that are counter to my own as a long. Before DTC (and CCS) a short would have find a willing long. At times that was perhaps difficult. Indirect share ownership makes this ridiculously easy. And also makes other forms of market manipulation easier as well.
I certainly didn't intend this to come across as alarmist and I don't really see it in the text, but I do think since we're all talking about rejiggering that global financial system of ours, it's time for the question of indirect share ownership - which most people just DON'T know about - to be revisited.
It was a temporary measure, and it would seem that now we've got the technology. But migrating to such a system would, no doubt, be expensive, so its not clear if this will ever change.
posted by Mutant at 6:57 AM on October 24, 2008 [20 favorites]
The SEC's overview of your options when it comes to owning stock.
posted by TedW at 7:00 AM on October 24, 2008
posted by TedW at 7:00 AM on October 24, 2008
In taking an opposite view - electronic settlement has allowed the stock exchange to process at least an order of magnitude more trades than paper certificates ever did. On a bad day, should you want to sell, your trade gets done, and you get your money. One of the problems with 1929 was the (paper) ticker couldn't keep up with the volume of trades, to the dismay of week traders (yes, day traders needed to buy a seat) and everyone else. If you can only see the price for six hours ago, or yesterday, you have a worse deal going. If you aren't a market maker (whose job is making margin) you want the best market visibility/transparency you can get.
posted by bystander at 7:02 AM on October 24, 2008
posted by bystander at 7:02 AM on October 24, 2008
Hey guys, its the 79th year anniversary of Black Thursday!
posted by Mach5 at 7:04 AM on October 24, 2008
posted by Mach5 at 7:04 AM on October 24, 2008
I didn't see your post as being alarmist, Mutant. I was simply alarmed by it.
The more I learn about how the modern financial world works, the more I realize why recessions tend to come once a generation. And also why its so freakin' scary that this is now all happening when we're about 5+ years overdue.
posted by cimbrog at 7:05 AM on October 24, 2008
The more I learn about how the modern financial world works, the more I realize why recessions tend to come once a generation. And also why its so freakin' scary that this is now all happening when we're about 5+ years overdue.
posted by cimbrog at 7:05 AM on October 24, 2008
There is reason to be suspicious, or at least skeptical, of everybody and everything.
While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem. DTCC suggests that naked shorting is simply not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said. DTCC General Counsel Larry Thompson dismissively calls the claims "pure invention." The SEC, however, views naked shorting as a serious enough matter to have initiated two separate efforts to restrict the practice. And in July 2007, Senator Bennett suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them -- with DTCC officials called before the Senate Banking Committee. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing. The North American Securities Administrators Association, representing state stock regulators, filed a brief saying that if the claims were correct, its shareholders "have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interest."
Critics also contend that DTCC has been too secretive with information about where naked shorting is taking place. In 2007, WayPoint Biomedical sued DTCC for DTCC's refusal to comply with a subpoena request for documents that Waypoint needs to track trades in the company's shares. [Wikipedia]
posted by mandal at 7:08 AM on October 24, 2008
While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem. DTCC suggests that naked shorting is simply not widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said. DTCC General Counsel Larry Thompson dismissively calls the claims "pure invention." The SEC, however, views naked shorting as a serious enough matter to have initiated two separate efforts to restrict the practice. And in July 2007, Senator Bennett suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them -- with DTCC officials called before the Senate Banking Committee. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing. The North American Securities Administrators Association, representing state stock regulators, filed a brief saying that if the claims were correct, its shareholders "have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interest."
Critics also contend that DTCC has been too secretive with information about where naked shorting is taking place. In 2007, WayPoint Biomedical sued DTCC for DTCC's refusal to comply with a subpoena request for documents that Waypoint needs to track trades in the company's shares. [Wikipedia]
posted by mandal at 7:08 AM on October 24, 2008
Before DTC...a short would have find a willing long.
DTC must be short for "gay marriage".
posted by DU at 7:08 AM on October 24, 2008
DTC must be short for "gay marriage".
posted by DU at 7:08 AM on October 24, 2008
...facilitates short selling, and and other forms of market manipulation...
Do you consider short selling a form of market manipulation?
posted by Perplexity at 7:09 AM on October 24, 2008 [1 favorite]
Do you consider short selling a form of market manipulation?
posted by Perplexity at 7:09 AM on October 24, 2008 [1 favorite]
Related: DTCC in merger talks with LCH.Clearnet.
posted by preparat at 7:13 AM on October 24, 2008 [1 favorite]
posted by preparat at 7:13 AM on October 24, 2008 [1 favorite]
Oh wfew-as a believer in the system I am feeling better to understand you haven't discovered some new angle. Frankly, the kind of market ructions that are happening at the moment are the best example I have had in my time (35 sad years :-) when it is a time to buy. I don't want to be the guy who calls it, but in a down time everyone forgets the price of a security today reflects future earnings. And, of course, the risk they'll be out of business.
The easiest evidence that paperless stock broking is close to riskless is that Lehman's trades were 100% settled
posted by bystander at 7:20 AM on October 24, 2008
The easiest evidence that paperless stock broking is close to riskless is that Lehman's trades were 100% settled
posted by bystander at 7:20 AM on October 24, 2008
Come on guys, no need to fear. It says right there on their website that integrity and trust and quality and excellence are among thier core values.
posted by Pollomacho at 7:28 AM on October 24, 2008 [1 favorite]
posted by Pollomacho at 7:28 AM on October 24, 2008 [1 favorite]
Wow, this company could totally blow up the moon if they wanted. That's awesome!
posted by autodidact at 7:36 AM on October 24, 2008
posted by autodidact at 7:36 AM on October 24, 2008
No, Pollomacho, it says "Our values provide the moral compass by which we operate" which means that they seek out those values and devour them, thanks to their wacky internal compass that always leads them to a tasty morsel.
posted by blue_beetle at 7:39 AM on October 24, 2008 [5 favorites]
posted by blue_beetle at 7:39 AM on October 24, 2008 [5 favorites]
I now think the original post is all about whether shorting is fair.
On the one hand, the whole purpose of having a market is fundamentally long. And if you want to go short there is a secondary market of options (writing puts) that can accommodate negative sentimet.
I have yet to have explained to me, why, direct short selling, apart from having a more direct effect on share prices is preferable.
If you want to be short, well, explain again why it is in the security issuers interest to indulge that?
posted by bystander at 7:46 AM on October 24, 2008
On the one hand, the whole purpose of having a market is fundamentally long. And if you want to go short there is a secondary market of options (writing puts) that can accommodate negative sentimet.
I have yet to have explained to me, why, direct short selling, apart from having a more direct effect on share prices is preferable.
If you want to be short, well, explain again why it is in the security issuers interest to indulge that?
posted by bystander at 7:46 AM on October 24, 2008
I don't think the point is anti-electronic-settlement, but rather anti-middleman. Electronic settlement could be done directly.
posted by Nothing at 8:13 AM on October 24, 2008 [1 favorite]
posted by Nothing at 8:13 AM on October 24, 2008 [1 favorite]
All the stocks and bonds you think you own are actually owned by a company you've probably never heard of
WRONG. The stock is owned, for all meaningful legal purposes, by the "beneficial" owners of the stock. In other words, the individual or corporation that has paid for it. Cede & Co. or DTCC is merely the record holder of the shares, meaning that is the name on the stock certificate or entered on the book of the corporation's stock ledger. If DTCC were to convert the securities for its own benefit they would be in clear violation of so many laws that it would be hard to know where to begin.
Saying something is owned by DTCC simply because their name is on the security evinces an unsophisticated understanding of the securities market.
If anyone has any specific questions about these mechanics, I can elaborate.
posted by gagglezoomer at 8:25 AM on October 24, 2008 [3 favorites]
WRONG. The stock is owned, for all meaningful legal purposes, by the "beneficial" owners of the stock. In other words, the individual or corporation that has paid for it. Cede & Co. or DTCC is merely the record holder of the shares, meaning that is the name on the stock certificate or entered on the book of the corporation's stock ledger. If DTCC were to convert the securities for its own benefit they would be in clear violation of so many laws that it would be hard to know where to begin.
Saying something is owned by DTCC simply because their name is on the security evinces an unsophisticated understanding of the securities market.
If anyone has any specific questions about these mechanics, I can elaborate.
posted by gagglezoomer at 8:25 AM on October 24, 2008 [3 favorites]
The stock is owned, for all meaningful legal purposes, by the "beneficial" owners of the stock.
Except, you know, when someone wants to short a stock, how can I prevent that? Hey DTC I own 100 shares can you please, like not borrow that out? Kthx.
posted by geoff. at 8:29 AM on October 24, 2008 [1 favorite]
Except, you know, when someone wants to short a stock, how can I prevent that? Hey DTC I own 100 shares can you please, like not borrow that out? Kthx.
posted by geoff. at 8:29 AM on October 24, 2008 [1 favorite]
If you want to be short, well, explain again why it is in the security issuers interest to indulge that?
Exactly. The only value from short-selling is to the brokers (in fees collected) and the short-sellers. And why should a long investor's own shares be fair game for the use of speculators whose interests in the stock are diametrically opposed to their own? Never mind naked shorting: even above-board forms of short-selling are questionable, IMO.
At the very least, brokers should be required to find share holders who willingly consent to lending potential short-sellers their stock. A broker shouldn't be permitted to lend my stock to any random speculator who hopes to profit by seeing the value of those shares decline-- and especially not without asking me first. It's like making me slap myself in the face with my own hand and then charging me for it.
posted by saulgoodman at 8:29 AM on October 24, 2008 [1 favorite]
Exactly. The only value from short-selling is to the brokers (in fees collected) and the short-sellers. And why should a long investor's own shares be fair game for the use of speculators whose interests in the stock are diametrically opposed to their own? Never mind naked shorting: even above-board forms of short-selling are questionable, IMO.
At the very least, brokers should be required to find share holders who willingly consent to lending potential short-sellers their stock. A broker shouldn't be permitted to lend my stock to any random speculator who hopes to profit by seeing the value of those shares decline-- and especially not without asking me first. It's like making me slap myself in the face with my own hand and then charging me for it.
posted by saulgoodman at 8:29 AM on October 24, 2008 [1 favorite]
Wait, so what about all of that "short selling is a useful and important check on rampant speculation"?
These economics threads are incredibly interesting, but it makes being poor seem a whole lot more straight forward than the alternative.
posted by paisley henosis at 8:43 AM on October 24, 2008 [2 favorites]
These economics threads are incredibly interesting, but it makes being poor seem a whole lot more straight forward than the alternative.
posted by paisley henosis at 8:43 AM on October 24, 2008 [2 favorites]
DTCC is merely the record holder of the shares
Right. And they are not a custodian either.
posted by preparat at 8:43 AM on October 24, 2008
Right. And they are not a custodian either.
posted by preparat at 8:43 AM on October 24, 2008
But when I can't register my shares in my name, whomever is holding those shares can lend them out, WITHOUT my permission. So that entity is not only profiting on my shares, but the entity who borrowed them has opposing interests to my own.
This is exactly parallel to putting your money in a bank. The bank can then do all kinds of things with your money, such as currency trades and oil futures trades, which effectively and sometimes sharply decrease the value of the money you have deposited with it.
posted by jamjam at 8:52 AM on October 24, 2008 [2 favorites]
This is exactly parallel to putting your money in a bank. The bank can then do all kinds of things with your money, such as currency trades and oil futures trades, which effectively and sometimes sharply decrease the value of the money you have deposited with it.
posted by jamjam at 8:52 AM on October 24, 2008 [2 favorites]
But when I can't register my shares in my name, whomever is holding those shares can lend them out, WITHOUT my permission. So that entity is not only profiting on my shares, but the entity who borrowed them has opposing interests to my own.
You can register shares in your name. Just tell your broker you want to be the record holder. DTC can't "lend" your shares.
posted by gagglezoomer at 9:01 AM on October 24, 2008 [1 favorite]
You can register shares in your name. Just tell your broker you want to be the record holder. DTC can't "lend" your shares.
posted by gagglezoomer at 9:01 AM on October 24, 2008 [1 favorite]
Jamjam has it right. Any money you put into any kind of institution can be "used" for all kinds of purposes that you cannot control.
Also, it's a bit insane to think that your .001% of the float in a particular stock will make any difference at all in terms of whether shorts can get shares to borrow. The vast majority of shares are held by institutions like big pensions, insurance companies, mutual funds, hedge funds, etc., which all engage in securities lending in order to make a small additional return.
posted by Mid at 9:17 AM on October 24, 2008
Also, it's a bit insane to think that your .001% of the float in a particular stock will make any difference at all in terms of whether shorts can get shares to borrow. The vast majority of shares are held by institutions like big pensions, insurance companies, mutual funds, hedge funds, etc., which all engage in securities lending in order to make a small additional return.
posted by Mid at 9:17 AM on October 24, 2008
No, Pollomacho, it says "Our values provide the moral compass by which we operate" which means that they seek out those values and devour them, thanks to their wacky internal compass that always leads them to a tasty morsel.
I always love it when a company says something like "Honesty and integrity are our goals!" Which could be translated as, "We really wish that we were honest and had integrity. Hopefully, we'll get better at this, but right now we aren't cutting it."
posted by Pollomacho at 9:46 AM on October 24, 2008 [1 favorite]
I always love it when a company says something like "Honesty and integrity are our goals!" Which could be translated as, "We really wish that we were honest and had integrity. Hopefully, we'll get better at this, but right now we aren't cutting it."
posted by Pollomacho at 9:46 AM on October 24, 2008 [1 favorite]
gagglezoomer -- "You can register shares in your name. Just tell your broker you want to be the record holder. DTC can't "lend" your shares."
A couple of points here: first, by default, almost all brokerage accounts hold shares in street name, not the name of the account holder. This is pretty much a standard TOS when these accounts are opened. As this is buried in the fine print, most people simply don't know this, and will, in good faith, acquire shares that can then be lent out for short selling purposes.
Further, while all securities traded on US exchanges are eligible for direct registration, companies issuing these shares are by no means compelled to offer direct registration to investors. To do so, they must employ the services of a Transfer Agent who is DRS Eligible. DRS Eligibility has it's own criteria, including but not limited to
mid -- "Also, it's a bit insane to think that your .001% of the float in a particular stock will make any difference at all in terms of whether shorts can get shares to borrow. The vast majority of shares are held by institutions like big pensions, insurance companies, mutual funds, hedge funds, etc., which all engage in securities lending in order to make a small additional return."
Technically correct, but many of these relatively savvy market participants simply will NOT lend out securities to support shorts. Also, the 0.001% statistic is more than a little misleading, as most longs simply are not aware of what use their shares potentially could be put to. How many? While I don't have data, I'm confident that most retail investors didn't know this opposing viewpoint was almost routinely adopted by the keeper of their financial assets.
Prior to the widespread adoption of DTC, shorts had to find willing longs. If a company was facing tough business conditions that the long felt were severe but would, over time, pass, the shares would probably not be loaned out. Now a third party, who is entirely disinterested about the prospects of the company, makes this decision for the long, and does so solely on the basis of earning the broker call rate (currently about 3.25%).
posted by Mutant at 10:02 AM on October 24, 2008 [3 favorites]
A couple of points here: first, by default, almost all brokerage accounts hold shares in street name, not the name of the account holder. This is pretty much a standard TOS when these accounts are opened. As this is buried in the fine print, most people simply don't know this, and will, in good faith, acquire shares that can then be lent out for short selling purposes.
Further, while all securities traded on US exchanges are eligible for direct registration, companies issuing these shares are by no means compelled to offer direct registration to investors. To do so, they must employ the services of a Transfer Agent who is DRS Eligible. DRS Eligibility has it's own criteria, including but not limited to
- Become a limited participant of DTC
- Participate in DTC's Fast Automated Transfer Program (FAST) program
- Provide a Direct Mail by Agent (DMA) function
- Have electronic communication links with DTC
- Receive training on DRS and Profile
- Participate in a Surety program to initiate Profile transactions.
mid -- "Also, it's a bit insane to think that your .001% of the float in a particular stock will make any difference at all in terms of whether shorts can get shares to borrow. The vast majority of shares are held by institutions like big pensions, insurance companies, mutual funds, hedge funds, etc., which all engage in securities lending in order to make a small additional return."
Technically correct, but many of these relatively savvy market participants simply will NOT lend out securities to support shorts. Also, the 0.001% statistic is more than a little misleading, as most longs simply are not aware of what use their shares potentially could be put to. How many? While I don't have data, I'm confident that most retail investors didn't know this opposing viewpoint was almost routinely adopted by the keeper of their financial assets.
Prior to the widespread adoption of DTC, shorts had to find willing longs. If a company was facing tough business conditions that the long felt were severe but would, over time, pass, the shares would probably not be loaned out. Now a third party, who is entirely disinterested about the prospects of the company, makes this decision for the long, and does so solely on the basis of earning the broker call rate (currently about 3.25%).
posted by Mutant at 10:02 AM on October 24, 2008 [3 favorites]
This is exactly parallel to putting your money in a bank. The bank can then do all kinds of things with your money, such as currency trades and oil futures trades, which effectively and sometimes sharply decrease the value of the money you have deposited with it.
No, it's not analogous because the bank engages in these activities, and we as account holders assume those risks, in return for an interest yield (and under no circumstances are banks permitted to speculate so much with our deposits that our account balances actually decline--well, at least not so we'd ever know about it). What do we get in return for letting a brokerage lend out our stock? The analogy is flawed.
posted by saulgoodman at 11:00 AM on October 24, 2008
No, it's not analogous because the bank engages in these activities, and we as account holders assume those risks, in return for an interest yield (and under no circumstances are banks permitted to speculate so much with our deposits that our account balances actually decline--well, at least not so we'd ever know about it). What do we get in return for letting a brokerage lend out our stock? The analogy is flawed.
posted by saulgoodman at 11:00 AM on October 24, 2008
What do we get in return for letting a brokerage lend out our stock?
The ability to trade it at will without having to go through a transfer agent or send in certificates as well as not having to keep said certificates in a safe place and possibly have to replace them with some hassle if they are lost, stolen, or destroyed.
posted by TedW at 11:06 AM on October 24, 2008
The ability to trade it at will without having to go through a transfer agent or send in certificates as well as not having to keep said certificates in a safe place and possibly have to replace them with some hassle if they are lost, stolen, or destroyed.
posted by TedW at 11:06 AM on October 24, 2008
Technically correct, but many of these relatively savvy market participants simply will NOT lend out securities to support shorts.
Mutant -- this is just incorrect. The biggest pensions and mutual funds in the country all lend their securities out. Here is one article I found with a few seconds on google. The article says that the huge ETF players like State Street loan the shares underlying their ETFs. I am sure if you dig into the prospectus for the mutual funds you hold, you will see that they disclose securities lending as well. There is massive liquidity in loaned shares coming from these institutional players. My individual holdings or yours (or even a bunch of other retail investors holdings) don't make a dent.
posted by Mid at 11:08 AM on October 24, 2008
Mutant -- this is just incorrect. The biggest pensions and mutual funds in the country all lend their securities out. Here is one article I found with a few seconds on google. The article says that the huge ETF players like State Street loan the shares underlying their ETFs. I am sure if you dig into the prospectus for the mutual funds you hold, you will see that they disclose securities lending as well. There is massive liquidity in loaned shares coming from these institutional players. My individual holdings or yours (or even a bunch of other retail investors holdings) don't make a dent.
posted by Mid at 11:08 AM on October 24, 2008
What do we get in return for letting a brokerage lend out our stock? The analogy is flawed.
A brokerage would say that lending defrays other costs, which results in a savings to you.
If you own a mutual fund, the fund is very likely lending shares and you are likely profiting in some small way (or getting reduced costs).
posted by Mid at 11:09 AM on October 24, 2008
A brokerage would say that lending defrays other costs, which results in a savings to you.
If you own a mutual fund, the fund is very likely lending shares and you are likely profiting in some small way (or getting reduced costs).
posted by Mid at 11:09 AM on October 24, 2008
"If a company was facing tough business conditions that the long felt were severe but would, over time, pass, the shares would probably not be loaned out."
If I feel this way why wouldn't I take some short's money to let him make the opposite (IMHO foolish) bet?
posted by Wood at 11:19 AM on October 24, 2008
If I feel this way why wouldn't I take some short's money to let him make the opposite (IMHO foolish) bet?
posted by Wood at 11:19 AM on October 24, 2008
Wood wrote: If I feel this way why wouldn't I take some short's money to let him make the opposite (IMHO foolish) bet?
I believe that's exactly Mutant's point. You should get to make that decision for yourself, not be forced into it by a coercive system.
posted by wierdo at 11:36 AM on October 24, 2008
I believe that's exactly Mutant's point. You should get to make that decision for yourself, not be forced into it by a coercive system.
posted by wierdo at 11:36 AM on October 24, 2008
I have paper certificates of stocks when I know they are stocks I'm not going to sell in the foreseeable future. (For example, my great grandfather gave me Consolidated Edison stock when I were born. I hold those original shares in paper certificate. (They're lovely too...very ornamental.) Since that time the certificates were issued, the stock has been continuously reinvested on every dividend quarter. Those shares which have accrued through reinvestment are on record at ConEd, and I am holder of record, but I don't hold the paper in my hands because I don't need to.)
However, stocks that I may want to sell I leave in street name. Which, sounds kinda spooky, but really it's the only way to make a trade quickly without having to send your certificates to the broker to be able to sell them.
That said, in this market, I don't anticipate selling anything anytime soon, and getting and vaulting paper certificates isn't a bad idea.
posted by dejah420 at 11:43 AM on October 24, 2008
However, stocks that I may want to sell I leave in street name. Which, sounds kinda spooky, but really it's the only way to make a trade quickly without having to send your certificates to the broker to be able to sell them.
That said, in this market, I don't anticipate selling anything anytime soon, and getting and vaulting paper certificates isn't a bad idea.
posted by dejah420 at 11:43 AM on October 24, 2008
Weirdo I can see that half of the point but the other question is would this make a substantial difference and my question is if I'm long and someone wants to pay me to borrow my stocks why wouldn't I let them have it?
posted by Wood at 11:51 AM on October 24, 2008
posted by Wood at 11:51 AM on October 24, 2008
Brokerages can only lend out shares from margin accounts, not cash accounts. It seems that if you're okay with the idea of buying stock with money you don't have, you shouldn't be offended by people selling shares they don't own.
Margin trading is a mechanism for inflating stock prices. Short selling is a mechanism for deflating stock prices. Seems that they balance and create market efficiency.
posted by JackFlash at 12:43 PM on October 24, 2008
Margin trading is a mechanism for inflating stock prices. Short selling is a mechanism for deflating stock prices. Seems that they balance and create market efficiency.
posted by JackFlash at 12:43 PM on October 24, 2008
All this just drives one major point home to me: Investors in the stock market no longer see themselves as investing in companies, they see themselves as playing stocks.
That's why good news about a company's fundamentals can just as often leave share prices unaffected or fail to reverse a downward trend as not, and it might be why long-term market growth no longer seems guaranteed and we've seen the market basically just treading water, not making any positive growth on average, over the last ten years: traders can just as easily make money "betting" on the downside as on the upside (especially with the increasing speed and ease of electronic trade), so where's the incentive pushing the market toward long-term positive growth?
The short and long positions effectively exert pricing pressure in opposite directions and cancel each other out (there doesn't even have to be a really high ratio of short interest to float on a stock for this effect to obtain--disproportionate sell-offs by jittery or short-term investors cutting losses can be triggered by a few well-timed rumors and a sudden, slight increase in short interest), and so overtime, the market as a whole stagnates.
But what's really striking to me in all of this is that the idea of investing in a stock as a way of participating in the ownership of an actual company has become so remote and abstract it hardly factors into anyone's thinking anymore. Isn't that a little weird?
I'm long and someone wants to pay me
Who said anything about getting paid? You don't get paid. I don't count paying for my broker's million dollar bonus--even with the enhanced level of service I would presumably get as a result--as a form of me getting paid. Investors already pay brokers fees to be brokers. I doubt anyone would starve if my broker were no longer allowed to freely reuse my stocks to do a little extra business on the side.
posted by saulgoodman at 12:44 PM on October 24, 2008 [2 favorites]
That's why good news about a company's fundamentals can just as often leave share prices unaffected or fail to reverse a downward trend as not, and it might be why long-term market growth no longer seems guaranteed and we've seen the market basically just treading water, not making any positive growth on average, over the last ten years: traders can just as easily make money "betting" on the downside as on the upside (especially with the increasing speed and ease of electronic trade), so where's the incentive pushing the market toward long-term positive growth?
The short and long positions effectively exert pricing pressure in opposite directions and cancel each other out (there doesn't even have to be a really high ratio of short interest to float on a stock for this effect to obtain--disproportionate sell-offs by jittery or short-term investors cutting losses can be triggered by a few well-timed rumors and a sudden, slight increase in short interest), and so overtime, the market as a whole stagnates.
But what's really striking to me in all of this is that the idea of investing in a stock as a way of participating in the ownership of an actual company has become so remote and abstract it hardly factors into anyone's thinking anymore. Isn't that a little weird?
I'm long and someone wants to pay me
Who said anything about getting paid? You don't get paid. I don't count paying for my broker's million dollar bonus--even with the enhanced level of service I would presumably get as a result--as a form of me getting paid. Investors already pay brokers fees to be brokers. I doubt anyone would starve if my broker were no longer allowed to freely reuse my stocks to do a little extra business on the side.
posted by saulgoodman at 12:44 PM on October 24, 2008 [2 favorites]
Seems that they balance and create market efficiency.
If "efficiency" = "growth stagnation," I think you might be on to something.
posted by saulgoodman at 12:46 PM on October 24, 2008
If "efficiency" = "growth stagnation," I think you might be on to something.
posted by saulgoodman at 12:46 PM on October 24, 2008
There's nothing stopping people from having their brokers DWAC their positions from DTCC, but they do so at thr cost of certificates (some agents charge 40-50 bucks or more a pop) and speed of sale.You're not going to be able to sell yoiur shares as quickly as if they're in book entry form ready to go. Also, if a corporate action takes place, its up to you to exchange the cert with the agent and pay all of those fees along with it.
Give me book entry any day over this hassle.
posted by dr_dank at 1:02 PM on October 24, 2008
Give me book entry any day over this hassle.
posted by dr_dank at 1:02 PM on October 24, 2008
bystander:I now think the original post is all about whether shorting is fair.
I think it's about what it literally states. There's no need to assume it's about anything else. It's possible that it's fear-mongering, perhaps, but if it sheds light on an aspect of the stock market that probably 99% percent of people, and that's a charitable figure, didn't know about, then it is Good.
We have a president still in power whose administration has made it their business to hack government in as many ways as they can, down to claiming they weren't notified of an EPA edict because they refused to open that email. Who's to say the owners of this company couldn't hack the stock market if the wrong guy got in charge there? The best defense against hacking is to know the system.
posted by JHarris at 1:05 PM on October 24, 2008
I think it's about what it literally states. There's no need to assume it's about anything else. It's possible that it's fear-mongering, perhaps, but if it sheds light on an aspect of the stock market that probably 99% percent of people, and that's a charitable figure, didn't know about, then it is Good.
We have a president still in power whose administration has made it their business to hack government in as many ways as they can, down to claiming they weren't notified of an EPA edict because they refused to open that email. Who's to say the owners of this company couldn't hack the stock market if the wrong guy got in charge there? The best defense against hacking is to know the system.
posted by JHarris at 1:05 PM on October 24, 2008
Saying something is owned by DTCC simply because their name is on the security evinces an unsophisticated understanding of the securities market.
I'll be over here, giggling in the corner.
posted by rodgerd at 1:30 PM on October 24, 2008
I'll be over here, giggling in the corner.
posted by rodgerd at 1:30 PM on October 24, 2008
Give me book entry any day over this hassle.
You've set up a false dichotomy, which is kind of the whole point of this post. There's no need for a third party to hold your shares in this day and age. We can manage ownership electronically.
posted by rodgerd at 1:31 PM on October 24, 2008 [2 favorites]
You've set up a false dichotomy, which is kind of the whole point of this post. There's no need for a third party to hold your shares in this day and age. We can manage ownership electronically.
posted by rodgerd at 1:31 PM on October 24, 2008 [2 favorites]
But what's really striking to me in all of this is that the idea of investing in a stock as a way of participating in the ownership of an actual company has become so remote and abstract it hardly factors into anyone's thinking anymore. Isn't that a little weird?
Indeed. I felt something similar during the dot.com boom, when I realised that people didn't start technology companies to grow them into the next Microsoft (or whoever) any more. They started them to be aquired. Quite a different vision.
posted by rodgerd at 1:35 PM on October 24, 2008 [1 favorite]
Indeed. I felt something similar during the dot.com boom, when I realised that people didn't start technology companies to grow them into the next Microsoft (or whoever) any more. They started them to be aquired. Quite a different vision.
posted by rodgerd at 1:35 PM on October 24, 2008 [1 favorite]
I like how DTCC describes a recent well-known incidents as the "Lehman Brothers Credit Event." It sounds like an annual sale at the local fake Macy's.
posted by grouse at 1:58 PM on October 24, 2008
posted by grouse at 1:58 PM on October 24, 2008
Mutant, Thanks again for an amazing education (the portion I can comprehend) it's much appreciated. I feel fortunate you are here on MetaFilter to help make sense of and throw light on these very complicated matters which concern us all.
posted by nickyskye at 2:50 PM on October 24, 2008
posted by nickyskye at 2:50 PM on October 24, 2008
My last employer (a midwestern self-clearing brokerage firm) was taken out by an elaborate stock-loan fraud scheme, much of which involved some strange stuff happening through DTCC. (the biggest SIPC failure to date... or at least until this year, I suspect!)
I never really found out all the details, but I was quite surprised when I heard people openly questioning whether or not fraud had been perpetrated within the DTCC system, which I had thought was impossible.
I don't know what the outcome of that all was, though, as both SIPC and the SEC seemed more interesting in wrapping it all up and shoving it under the rug than to ask questions or shine a light on anything.
I'm not sure I understand why people in the thread are freaking out about a centralized clearing house, but I do understand the concern about securities being held in street name. That would make me particularly concerned now, given the higher level of risk at play. (plus if you want to lend out my securities then I better be receiving a cut...)
posted by EricGjerde at 3:26 PM on October 24, 2008 [1 favorite]
I never really found out all the details, but I was quite surprised when I heard people openly questioning whether or not fraud had been perpetrated within the DTCC system, which I had thought was impossible.
I don't know what the outcome of that all was, though, as both SIPC and the SEC seemed more interesting in wrapping it all up and shoving it under the rug than to ask questions or shine a light on anything.
I'm not sure I understand why people in the thread are freaking out about a centralized clearing house, but I do understand the concern about securities being held in street name. That would make me particularly concerned now, given the higher level of risk at play. (plus if you want to lend out my securities then I better be receiving a cut...)
posted by EricGjerde at 3:26 PM on October 24, 2008 [1 favorite]
Mutant - If a company was facing tough business conditions that the long felt were severe but would, over time, pass, the shares would probably not be loaned out.
Why not? This was before my time, I've no idea how things worked way back then, and I'm a bit curious how difficult it was to sell short. If you're not planning on selling those shares, thinking the company will recover, wouldn't you be more likely to loan them out? How is there any significant risk or cost in doing so?
posted by sfenders at 4:46 PM on October 24, 2008
Why not? This was before my time, I've no idea how things worked way back then, and I'm a bit curious how difficult it was to sell short. If you're not planning on selling those shares, thinking the company will recover, wouldn't you be more likely to loan them out? How is there any significant risk or cost in doing so?
posted by sfenders at 4:46 PM on October 24, 2008
You know, when that whiteboard video about how short selling worked went around, while I was watching it, I was wondering to myself, what incentive does the lender of the stock have to make it available? And how can all the parties that want to buy stock be so assured of getting it, and those who want to sell be so assured of selling it?
If all the stock is really owned by a proxy party, these questions are suddenly seem less mysterious.
posted by JHarris at 7:23 PM on October 24, 2008
If all the stock is really owned by a proxy party, these questions are suddenly seem less mysterious.
posted by JHarris at 7:23 PM on October 24, 2008
I also note that, looking at the DTCC's homepage, the largest letters read "DTCC IS RELIABLE." Who the hell proclaims their reliability out of the blue unless some people were questioning it?
posted by JHarris at 7:25 PM on October 24, 2008
posted by JHarris at 7:25 PM on October 24, 2008
I just want to mention I can lift really heavy things.
posted by Smedleyman at 7:43 PM on October 24, 2008 [1 favorite]
posted by Smedleyman at 7:43 PM on October 24, 2008 [1 favorite]
No, it's not analogous because the bank engages in these activities, and we as account holders assume those risks, in return for an interest yield
Assuming your bank is FDIC insured and you have less than 250K (or what ever the limit is now), you are taking no risk for the interest you earn from banking deposits.
(and under no circumstances are banks permitted to speculate so much with our deposits that our account balances actually decline--well, at least not so we'd ever know about it).
Banks routinely take on too much risk due to the FDIC insurance. From 1965 to 1983, FDIC lost about 1 to 2 billion dollars due to banks taking on too much risk and losing deposits. By 1999 the loss was just under 39 billion. One current estimate is that this time the FDIC will lose about 100 to 150 billion. These numbers are total losses, after factoring in the premiums paid in.
And of course, that estimate is on top of whatever losses may be realized from the estimated 700 billion bailout package, which is certain to increase considerably.
(BTW, I'm certainly not against FDIC insurance. I think we just need much more regulation to keep the banks from taking on the levels of risk that the insurance allows.)
What do we get in return for letting a brokerage lend out our stock? The analogy is flawed.
In theory, the brokerage could have lower operating cost from the fees collected by lending the stocks, which could be passed on to the consumer. I'm not arguing either way though on that one.
But what's really striking to me in all of this is that the idea of investing in a stock as a way of participating in the ownership of an actual company has become so remote and abstract it hardly factors into anyone's thinking anymore. Isn't that a little weird?
That's something that is much more pervasive than I previously realized. I've been watching the financial shows on cable a lot recently. These guys are talking about what stocks are good or bad constantly but only occasionally mention that these recommendations are based on a time frame of days to weeks. For them, being long a stock is holding it for a year. To me, this is creating a great opportunity for being long in terms of years and decades - which is why I'm buying quality companies with beaten down stocks (and bracing for a ride).
posted by Bort at 7:18 AM on October 25, 2008
Assuming your bank is FDIC insured and you have less than 250K (or what ever the limit is now), you are taking no risk for the interest you earn from banking deposits.
(and under no circumstances are banks permitted to speculate so much with our deposits that our account balances actually decline--well, at least not so we'd ever know about it).
Banks routinely take on too much risk due to the FDIC insurance. From 1965 to 1983, FDIC lost about 1 to 2 billion dollars due to banks taking on too much risk and losing deposits. By 1999 the loss was just under 39 billion. One current estimate is that this time the FDIC will lose about 100 to 150 billion. These numbers are total losses, after factoring in the premiums paid in.
And of course, that estimate is on top of whatever losses may be realized from the estimated 700 billion bailout package, which is certain to increase considerably.
(BTW, I'm certainly not against FDIC insurance. I think we just need much more regulation to keep the banks from taking on the levels of risk that the insurance allows.)
What do we get in return for letting a brokerage lend out our stock? The analogy is flawed.
In theory, the brokerage could have lower operating cost from the fees collected by lending the stocks, which could be passed on to the consumer. I'm not arguing either way though on that one.
But what's really striking to me in all of this is that the idea of investing in a stock as a way of participating in the ownership of an actual company has become so remote and abstract it hardly factors into anyone's thinking anymore. Isn't that a little weird?
That's something that is much more pervasive than I previously realized. I've been watching the financial shows on cable a lot recently. These guys are talking about what stocks are good or bad constantly but only occasionally mention that these recommendations are based on a time frame of days to weeks. For them, being long a stock is holding it for a year. To me, this is creating a great opportunity for being long in terms of years and decades - which is why I'm buying quality companies with beaten down stocks (and bracing for a ride).
posted by Bort at 7:18 AM on October 25, 2008
Yep. Good post Mutant. This and counter-party risk is why I'm moving my liquid assets to currency ETFs (Jeez, I'm depending on you Deutsche-Bank, don't let me down) and put options.
posted by Rafaelloello at 6:42 PM on October 25, 2008
posted by Rafaelloello at 6:42 PM on October 25, 2008
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