Custody-Only Trading

DEFINITION of 'Custody-Only Trading'

A system in which shares must be registered to the holder by name and can only be traded in physical form. The adoption of custody-only trading requires any purchases or transfers of stock to be placed through the issuing company's transfer agent. The transfer agent cancels the shares received from the seller, and issues a new share certificate for an equivalent number of shares to the buyer. While custody-only trading is a cumbersome process, some companies implement it to counter "naked" short selling.

BREAKING DOWN 'Custody-Only Trading'

While conventional short selling involves the sale of borrowed stock, "naked" short selling refers to short sales by traders who have no intention of borrowing and then selling the stock. Rather, they simply resort to short selling without borrowing the stock or ensuring that it can be borrowed, thereby driving down the price of the stock precipitously. Since custody-only trading requires purchase and sales of physical shares only, there is no stock for short-sellers to borrow or pretend to borrow, thereby discouraging naked shorting. In 2008, the SEC banned "abusive" naked short selling in the United States.

RELATED TERMS
  1. Naked Shorting

    The illegal practice of short selling shares that have not been ...
  2. Transfer Agent

    A trust company, bank or similar financial institution assigned ...
  3. Custodian

    A financial institution that holds customers' securities for ...
  4. Safekeeping

    The storage of assets or other items of value in a protected ...
  5. Bearer Form

    A security not registered in the issuing corporation's books ...
  6. Holder Of Record

    The name of the person who is the registered owner of a security ...
Related Articles
  1. Options & Futures

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.
  2. Active Trading Fundamentals

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  3. Options & Futures

    Brokers and Online Trading

    How do you find the right broker for your investment needs? Start by reading our broker tutorial.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Mutual Funds & ETFs

    The 3 Best Downside Protection Equity Mutual Funds

    Learn how it is possible to profit in a bear market by owning the correct selection of mutual funds that provide downside protection and opportunity.
  6. Investing News

    With Short Interest Surging, Is it Time to Buy?

    What do you think the smart money is doing when the market moves higher? Apparently, they're building short positions.
  7. Trading Strategies

    Why Is Short Selling Legal? A Brief History

    In the U.S., before a short sale can occur, broker/dealers must have reasonable grounds to believe that shares can be borrowed and delivered on time.
  8. Mutual Funds & ETFs

    The Long and Short of Trading Oil ETFs/ETNs (UWTI)

    Here are several oil ETFs to consider for both shorts and longs.
  9. Stock Analysis

    Are Brick and Mortar Retailers Headed Into Bear Markets?

    The online sales revolution has altered the playing field for brick and mortar retailers, placing them at a disadvantage to purely web-based operations.
  10. Mutual Funds & ETFs

    Should You Go Short or Long Oil with ETFs?

    If you want to go long or short oil consider these ETFs. But either way, use caution.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  3. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  4. What is the difference between a short squeeze and short covering?

    "Short covering" and "short squeeze" are different terms to describe a situation involving short positions. A short squeeze ... Read Full Answer >>
  5. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  6. How can I evaluate if a stock is a short squeeze?

    To evaluate whether a stock is a short squeeze, traders should examine its fundamentals, short interest and price history. ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center