Securities market participants (United States)
Supporting these transactions, there are three central securities depositories and four clearing organizations that assure the settlement of large volumes of trades.
Securities include equities (stocks), bonds (US Government, corporate and municipal), and options thereon.
Hence retail (individual) investors generally are required to keep their investment assets in custody with the broker-dealer through which they buy and sell securities.
Furthermore, institutional investors may buy and sell through any number of broker-dealers which in turn settle such trades at the designated custodians and prime brokers.
[9] Institutional investors must inform their executing broker-dealers as to whether orders are long or short, since those brokers have no way of knowing their clients' positions are in each security.
Were investors able either to buy short naked (without borrowing money to pay), or sell short naked (without borrowing securities to deliver), such practices could easily lead to market manipulation of stock prices: since buyers or sellers would not have the restraint of providing cash or securities, they could conceivably have unlimited buys or sells, which would drive prices up or down.
Naked short buying is not a problem because custodians and prime brokers have their own finances from which to lend money to their clients in order to settle the trades.
Hedge funds are expected to find sources of stock which can be borrowed before executing short sell orders.
Whether such a "fail" is due to poor co-ordination among the various parties (hedge fund, lending entity and prime broker) or to a naked short sale is impossible to determine.
In the US the SEC effectively ended such instances by making the cost of a failed short sell too expensive for the hedge fund to risk.
Price discovery is optimized by bringing together at one point in time and place all buy and sell orders for a particular security.
Rather there are a number of primary dealers which buy directly from the government and resell to other broker-dealers and institutional investors.
[23][24] Transfer agents provide a variety of services to issuing companies, including: maintaining a registry of all shareholders, paying dividends and conducting proxy campaigns.
The other 9,900,000 have been purchased by investors who hold them in book entry form through accounts at broker-dealers (retail), custodians and prime brokers (institutional).
[25] There are three central securities depositories and four clearing organizations in the US: US equities, corporate and municipal bonds can be issued in certificated form, though this practice has been largely replaced due to the costs and inefficiencies of keeping them.
Rather holdings are kept as "immobilized" or "street name", with the beneficial owners keeping them in accounts at broker-dealers and banks, just as they do for currencies.
Each day DTCC reconciles with the relevant transfer agent the number of shares held in its accounts for its member banks and broker-dealers.
In turn, other banks and broker-dealers hold accounts with DTCC member firms, creating a chain of ownership down to the beneficial owner.
[31] The great advantage of this approach is the efficiency and low cost involved in settling large volumes of trades.
Instead, the clearing brokers keep book entry positions at the Federal Reserve on behalf of their various clients.
[33] The Financial Stability Oversight Council has designated each of these institutions, with the exception of the Federal Reserve, as a Systemically important financial market utility[34] Market data consolidators address the needs of investors and regulators who wish to know, at any instant during the trading day, what the National Best Bid and Offer is for any security, the last sale price and other pertinent information related to trading the security.
