Trading in Street Name Allows for Continuous Net S

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Trading in Street Name Allows for Continuous Net Settlement

As customers execute buy and sell orders, brokers interact with the DTCC and other brokers all on an electronic basis and their inventory builds and declines accordingly. This is done through continuous net settlement which I described in detail in Part 7: Illegal Naked Shorting: DTCC Continuous Net Settlement and Stock Borrowing Programs Have Loopholes That Facilitate Illegal Naked Shorting

I don’t want to reiterate my discussion on continuous net settlement, but it is important to refresh you on a couple of points. During the course of each trading day, clearing brokers may execute hundreds or tens of thousands of buy and sell orders. Instead of matching each buy order with a corresponding sell order, these trades are executed out of the inventory of street name shares of the member firms. This inventory consists of all the shares held in their customer accounts as well as their proprietary trading accounts. At the end of the day, they sum up all of the buys and sells and if there is a surplus of buys, this is added to their inventory of street name shares at the DTCC and if there is a deficit, it is subtracted. It is very important to understand that clearing brokers are not matching each order between buyer and seller. They are buying and selling for their inventory.

Let’s look at what this means. Let’s say that there are 10,000,000 registered shares of Company XYZ held at Cede, which means that there are 10,000,000 shares held in street name. Let’s say that Merrill, Lynch at the beginning of the day, holds 1,000,000 shares of its client’s shares in street name. Now let’s say that throughout a trading day that Merrill Lynch clients sold 100,000 more of those shares than they bought. At the end of the day, (technically on settlement day at T+2) this would mean that the Merrill position would be reduced to 900,000 shares in street name and that 100,000 shares in street name would be transferred by the DTC to various other brokers. Technically, there is an adjustment for failed to deliver securities, but we can ignore this for the sake of this example.

All of the DTC participants transact securities in street name that are swapped back and forth like incoming and outgoing tides on a shore. In theory, the number of shares held in street name by the DTC participants does not vary. Just as with the actual 10,000,000 registered shares held by Cede, there should 10,000,000 shares held in street name by Merrill Lynch, Goldman Sachs, Morgan Stanley and the many other participants. In theory then, the number of street name shares should equal the registered shares sitting in Cede’s vault. In practice, Wall Street creates massive numbers of counterfeit shares. Some informed observers have speculated that in some cases, the number of counterfeit shares issued can match or exceed registered shares. Once created, the DTCC does not differentiate between counterfeit and legitimate street name securities.

There is no Transparency with the Electronic Clearing and Settlement System That we now Use

A critical shortcoming of the DTCC electronic system is total lack of transparency to outsiders and even to the SEC which is supposed to be the regulator of the securities industry. Only the DTCC and broker dealers who own the DTCC have access to the entirety of data showing who actually bought and sold shares and to determine if illegal naked shorting has created counterfeit shares. This information is or should be readily available but attempts to access it are stonewalled and met with determined resistance.

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While we wait a good read: https://smithonstocks.com/part-8-illegal-nake...f-stocks/c
Go PTOI!!!

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