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.
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Finance: What is an Agency Relationship?202 Views
Finance a la Shmoop! What is an agency relationship? Alright well this
one could have come straight out of Hollywood.
Because in finance land, no relation to Disneyland, the same kind of client agent
thing exists. I'll deal with a lot less than ten
percent per transaction commissions. That's usually standard in the old
Hollywood. Well you are granny gold digger, you're 97 year old husband, just[people at funeral]
died. Leaving you at 43 a wealthy woman. You meet with your stockbroker, now
turned private wealth manager, handsomey mic handsome and assess the
relationship here. Well handsomey, has a fiduciary
obligation to you, to act on your best behalf. He is effectively an extension of
you. He is your agent, in the same way your right hand is your agent when your
back itches. He must be open about his fee structure.
Like a common agency arrangement these days, has the client paying 1% of the[pile of money in mansion]
assets under management with the agent. Whether the agent does a ton of work for
the client like tons of trading, or whether he does a whole lot of nothing.
Well the dicey conversations here then revolve around whether that agent
encouraged his client, to put money in the very high, free hedge and private
equity funds run by the agents firm. And then, well you know, you could ask does
the agent then get a spife, or tip, or free trip for him and his family to[man on vacation]
Hawaii at the end of the year? Hmm does that happen? Could that happen?
Agency relationship. All right well the basic idea here is that an agent must
act in the best interests of the client no matter what. Even if the advice the
agent is giving the client is directly opposite, the best personal interests of
that agent. Like getting a lot of commission and that free trip to Hawaii.
And yeah that is the only relationship we want to have with an agent.[three people in office]
Sorry there.
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