Counter-Acting Naked Short Selling With Custody-Only Trading

Naked short selling is one of the key problems concerning the stock market. Traders short sell ‘naked’ stock, that is, stock that they don’t actually have. This brings down the market price on this stock and leaves those expecting the stock high and dry. best naked cam sites

However, there are ways to combat naked stock selling. One is to ban all short sellers from the market. This is not the best method and it is completely unfair and will be met with an outrage by the public. Why should legitimate short sellers be punished because some people exhort the system?

Another, more logical approach to ending naked short selling is called custody-only transfer?

So what is a custody-only transfer?

A custody-only transfer, also known as custody-only trading is a system which the stock shares must be registered to the name and can only be traded in physical form. Essentially, the stock is a commodity in custody of an agent. This custody-only trading protects shareholders from naked short sellers because the shares must be physically held by the seller. Naked short sellers cannot pretend to have access to the borrowed stock.

Many companies have already set this system into motion including Trezec and JAG Media Holdings Inc. Others, like Pacel are considering the switch to custody-only trading.

So how does custody-only trading actually work?

Custody only trading relies on transfer agents. Transfer agents act as the middle party between the buyer and the seller. They are banks or financial institutes that keep records of all account and transactions. They also cancel and issue certificates and deal with any problems in the investing process. They are critical to safe stock trading, especially with the rise of naked short sellers.

The purchase or transfers of stock must be placed through the issuing company’s transfer agent in order for the transaction to be legitimate. Furthermore, the transfer of stock is only valid with the delivery of a physical stock certificate. Once this piece of paper has been received by their transfer agent, the certificates of the selling stockholder would be cancelled and a new certificate created in the new buyer’s name.

This may seen like a primitive way to transfer stock; however, it is necessary. It is a way to ensure buyers that any purchase they make from their company’s stock will be from proper stockholders, not from naked short sellers.

With this custody-only system, people are hoping to squeeze out the naked short sellers. Naked short sellers work on non-existent stock, which deflates the value of the stock while simultaneously artificially inflating ownership. Putting naked short sellers out of business is perhaps the greatest benefit of the custody-only system. However, other benefit includes security within shareholders and trust when betting on the stock market.