Custody only trading is a stock trading system that can only be done directly (physical transactions) and the shares are registered in the name of the holder. The operation of the custody only trading system is that investors buy shares to be placed in the transfer agent of the issuing company. Later the transfer agent will issue a new share certificate according to the name of the investor (buyer) in the same amount. Meanwhile, the old share certificate registered in the name of the previous investor (seller) will be canceled by the transfer agent.
Custody only trading is not practical, but many companies use it to deal with naked short selling. Naked short is the practice of illegally short selling shares. Where investors who do so do not intend to borrow shares and do not have the ability to buy them, for example through the over the counter (OTC) market. The practice of naked short selling was still a gray matter until it was regulated in 2008 because it caused the stock market to fall. Since then naked short is considered illegal by the United States stock exchange authorities.
Now with physical transactions, naked short practices like this can be tackled early on. The impact is that only long-term investors will buy the company’s shares and drive stock prices to stabilize. However, there is a negative side that arises from custody only trading, namely the reduced liquidity of the shares on the stock exchange and the market becomes less efficient. In addition, sometimes there are transfer agents who do not meet the qualifications when registering with the Depository Trust Company (DTC). DTC is the world’s largest clearing and trustee company operating in the United States.
Custody-only trading refers to the system and mechanism of share trading where shares must be registered under the name of the holder/owner concerned through the mechanism and process when shares are purchased, a share certificate is made in the name of the owner and when shares are sold to another buyer, the old share certificate is canceled and just issued to the buyer. In addition, the Custody only trading system also regulates and emphasizes stock trading activities in physical form, both related to the process of buying and selling shares carried out.
It can be further explained that this Custody only trading system requires the mechanism for buying or transferring shares to be carried out through a transfer agent for the issuing company or if referring to the stock exchange system in Indonesia, it is related to the Custodian institution as an official and authorized institution that has the function of being a place of care or keeping documents. securities / share certificates traded by issuers listed on the stock exchange.
Weaknesses and benefit of the Custody only trading system in stock trading.
Weakness
One of the drawbacks of implementing the Custody only trading method which emphasizes trading in physical form is that in its implementation this system is considered less efficient because it requires a number of processes and takes longer than the general concept that has been used so far, which has used electronic stock trading systems and platforms. which emphasizes transaction processing speed and time efficiency required.
The Custody only trading method requires that the share owner / investor who wants to sell shares must contact a transfer agent who will facilitate the creation of a new share certificate on behalf of the new owner, and cancel the certificate of the previous owner and this mechanism is less favored by investors because the process is considered inefficient
Another weakness and drawback is the Custody-only trading system (Custody only trading) which prohibits Short Selling activities or short-term stock selling activities so that it is considered to limit investors’ freedom to take quick action.
One of the goals is to make it easier to complete transactions at a later date. custody: The party who keeps the securities traded
Benefit
Meanwhile, the advantage of this Custody only trading system is that it can first be seen from the ownership of the share ownership certificate which is actually processed according to the name of the owner so that it is clearer, safer and stronger in official procedures. Another advantage is that the custody only trading system reduces the potential for investors to carry out speculative transaction activities that can lead to uncontrolled stock market volatility due to the influence of emerging market sentiment.
To understand more deeply about custody-only trading, it is necessary to first understand that there are two transaction methods available in the capital market, namely through brokers and through custodians. Traders who use the broker will have a trading account under the auspices of the broker and are required to deposit a certain amount of money. Every day, traders who use brokerage services will make buying and selling actions and creating a very large accumulation of transactions. To facilitate the transaction mechanism, all securities and assets that occur are carried out on behalf of a broker involving a custodian. When traders A and B under broker XYZ buy certain shares, the shares will be listed in the name of broker XYZ.
Traders with super large capital, including investment banks to hedge funds, do not use brokerage services but directly transact with custodians through agent services. Every transaction made through the custodian by market participants tends to be in very large amounts. When an investment bank purchases certain shares on the New York Stock Exchange, such as shares with the code AAPL in large quantities, through the custodian, an AAPL share certificate will be submitted with the name of the investment bank in it, complete with a description of the number of shares purchased. Until finally, after a few years, when the AAPL shares will be sold to a hedge fund, the transaction will be carried out through the custodian and now it is the hedge fund’s turn to receive a new certificate explaining that they are the new owners of the AAPL shares.
conclusion
Transactions carried out by investment banks and hedge funds through direct custodians are an illustration of custody-only trading where they both buy and sell shares directly without going through the services of a broker. Therefore, amateur traders with small capital only have the opportunity to use the services of a broker and tend to rarely hear the term custody-only trading because this mechanism can only be carried out by institutions with large capital. When a large institution buys shares through a custodian, the shares can legally be included as assets in the balance sheet because the name of the institution has been recorded on the certificate. Meanwhile, stock traders with small capital who use brokerage services can technically record the shares purchased into assets in the balance sheet, but legally each share is on behalf of the broker.
