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.


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.

  1. Transfer Agent

    A trust company, bank or similar financial institution assigned by a corporation ...
  2. Safekeeping

    The storage of assets or other items of value in a protected area. Individuals ...
  3. Banking And Securities Industry ...

    A committee established in 1970 to standardize, automate and streamline stock ...
  4. Bearer Form

    A security not registered in the issuing corporation's books but that is payable ...
  5. Custodian

    A financial institution that holds customers' securities for safekeeping so ...
  6. Holder Of Record

    The name of the person who is the registered owner of a security and who has ...
  7. Naked Shorting

    The illegal practice of short selling shares that have not been affirmatively ...
  8. Short Call

    A type of strategy regarding a call option, which is a contract that allows ...
  9. Long-Short Ratio

    The amount of a security available for short sale compared to the amount of ...
  10. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. A stock ...
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