What Is a Cage?

In finance, “cage” is a colloquial term used to describe the department of a brokerage firm that is responsible for receiving and distributing physical stock and bond certificates.

Today, most investors hold their securities in street name, meaning they do not need to hold physical possession of their certificates. Instead, these documents are stored by their brokerage firm, thereby increasing convenience and reducing the risk of theft.

Key Takeaways

  • Cages are the departments of brokerage firms that keep track of physical securities certificates.
  • In the past, cages were widespread and heavily used, as all transactions required physical certificate transfers for settlement.
  • Today, the vast majority of security trading is done electronically, bypassing the need for physical transfers.

How Cages Work

To ensure that the ownership status of their clients’ securities are recorded and maintained, brokerage firms keep cages within their offices to ensure these physical certificates are secured. If these certificates are stolen or lost, their owners may be unable to prove their ownership rights. To protect against this risk, brokers’ cage departments often feature advanced security measures. Their general vault-like appearance is what caused them to become known as the firm’s “cage”.

Today, it might come as a surprise for most investors to realize that such departments still exist. After all, since the advent of fully electronic trading services, it is no longer necessary to encounter any physical securities certificates in order to invest in stocks or bonds. Instead, investors who purchase stocks today almost always have those stocks held in the street name of the broker rather than under the personal name of each investor. This means that the securities remain registered on the brokers’ books as though they belong to the brokerage firm itself. However, additional records within the brokerage firm establish the investor as the actual owner of the securities.

This method of investing electronically using the street name of the brokerage firm offers many advantages over taking physical possession of the security certificates. In addition to reducing the risk of theft, electronic investors can also execute purchase and sale transactions far more quickly than if the exchange of physical securities were involved. Without this improvement in speed, certain styles of investing, such as day trading or high-frequency trading (HFT), would be impossible.

In the past, investors who feared losing their physical security certificates would purchase indemnity bonds to protect themselves against this loss. These bonds would typically cost around 2% or 3% of the market value of the securities covered. This increased carrying cost of physical certificates is one of the reasons why electronic securities settlement has become so common.

Real World Example of a Cage

In recent decades, the quantity of physical certificates used in securities trading has steadily declined. Before the advent of electronic trading networks, brokerage firms relied on couriers physically transporting stock certificates to and from the relevant financial institutions. By the late 1960s, however, the sheer volume of paperwork involved in these transactions caused a period of high-profile administrative errors. 

One such notable event was the so-called “Paperwork Crisis” that gripped Wall Street, in which thieves managed to steal over $400 million of security certificates. This period of chaos encouraged the industry to adopt new technological solutions, such as the street-name registration method that is widespread today.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Speech by SEC Staff: International Securities Settlement Conference—The U.S. View of the Role of Regulation in Market Efficiency." Accessed May 24, 2021

  2. Securities and Exchange Commission Historical Society. "Transformation & Regulation: Equities Market Structure, 1934 to 2018." Accessed May 24, 2021.

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