INTRO: Do you know what happens when you buy a stock?
Most people would assume that their brokerage would go out and get a stock certificate under
your name. This way, even if the brokerage collapsed, those shares would belong to you.
But this is actually not what happens. When you buy a stock from your brokerage, you basically
get an IOU contract from the brokerage. This contract gives you certain rights to the stock
but not ownership. Before you get mad at the brokerages though, you should know that they
don’t own the stock either. When they want to buy or sell a stock on behalf of their
clients, they have to send their order to the Depository Trust Company or the DTC also
known as Cede & Co. The DTC will issue the brokerage an IOU statement, and this is what
gets passed down to you. So, it’s actually the DTC that not only owns your stock, but
also virtually all publicly traded shares and securities in the US and 131 other countries.
According to their official website, they’re job is to bring efficiency to the securities
industry by retaining custody of wait for it $54.2 trillion. And that was as of July
2017. Since then, the US stock market has grown $18 trillion and the US has issued trillions
of dollars worth of bonds, so the DTC’s total assets are likely well above $70 trillion
today. So, here’s how Cede & Co got to owning the world.
FOUNDING THE DTC: Taking a look back, the story of the DTC dates
back to the 1960s. America had not only recovered from the great depression but the economy
and more specifically the automotive industry was booming. Americans were making and spending
more money than ever before. Most of these guys had no interest in saving or investing.
Either they themselves or their parents had lost everything to the great depression, so
they felt that it was way better to just live in the moment. This is what really spawned
the terrible but extremely common trend of living paycheck to paycheck. If your retirement
can be ruined by some irresponsible financial institution, why save in the first place?
Despite this popular sentiment, given how large and diverse America is, there were naturally
some people who still wanted to invest their money. And given that these guys were making
more money than ever before, they were able to invest more money than ever before. This
resulted in unprecedented trade volume leading into the 1970s. The New York Stock Exchange
was regularly processing more than 8 million shares per day. Now, compared to today’s
6 billion shares per day, this was nothing. But, they didn’t have computers or fancy
technology that could just automatically execute each trade. So, they had to manually handle
8 million shares every single day, and this was basically their limit. So, in 1968, the
NYSE decided to create a securities clearing firm called the Central Certificate Service
or the CCS. The CCS was basically responsible for automating the stock market. The president
of the NYSE at the time, Robert Haack, promised quote, “We are going to automate the stock
certificate out of business by substituting a punch card.” Instead of keeping track
of ownership through stock certificates, the CCS kept all the stock certificates to themselves
and tracked ownership through electronic records. The NYSE hoped to reduce the prevalence of
stock certificates by 75% with the CCS, but there was one major issue. ⅔ of brokers
refused to use the service. Electronic records were extremely attractive for brokers, but
they didn’t trust the CCS or computers in general for that matter. So, most brokers
opted to continue in their old ways. Despite this, the CCS continued to expand their services
and attempted to build credibility. In 1970, for instance, CCS’s services were extended
to the American Stock Exchange. Around the same time, we also saw the creation of the
Banking and Securities Industry Committee or BASIC. BASIC gave bankers and brokerages
a way to propose rules and standards that the CCS must follow. Banks and brokers deliberated
for years about how such an institution should be run, but eventually, in 1973, BASIC members
agreed to create a beefed up version of the CCS called the DTC.
INNER WORKINGS OF THE DTC: Once the DTC was created, more and more brokerages
jumped on board. Though most brokerages didn’t use the CCS, they wanted to use it. They simply
didn’t want to explain to their clients that they will no longer receive stock certificates
because the brokerage is either too lazy or didn’t want to handle that much paper. But,
as notable banks and brokerages embraced the DTC, smaller institutions flooded in. Now,
that’s all cool and all, but how exactly does the DTC work? Well, I explained it as
an IOU contract at the beginning, but it’s of course not that simple. Whenever a brokerage
or bank agrees to work with the DTC, the DTC will take all of the institution’s stock
certificates, bond certificates, and money market instruments and enter them into their
database. The DTC already owns billions if not trillions of dollars worth of each security,
so they’ll mark down that Chase has rights to 10.4% of the DTC’s Apple shares and 12%
of their Google shares and so on and so forth. Whenever buy and sell orders flow in during
the day, the DTC tallies up the total inflow and outflow of each of their clients for each
security. And at the end of each day, the DTC simply changes the numbers in their database
to reflect the result of the trading day. For example, Chase’s stake in Apple might
be reduced to 10.2% and their stake in Google might be increased to 12.2%, but no stock
certificates are actually swapped and no paper is being traded. The DTC only settles securities
at the end of each day, and each security takes different amounts of time to process
based on their time sensitivity. For example, options have expiration dates, so they’re
processed within 1 business day. Stocks on the other hand take 2 business days while
slower moving assets like bonds take 3 days. If you have a cash brokerage account, you’re
probably well aware of these settlement times. Once you sell a stock, you actually have to
wait two days to get your money. But, with most brokerage accounts, the brokerage will
simply give you the money instantly and they’ll be reimbursed by the DTC over the next few
days. So, a lot of stock buyers are completely unaware of settlement times, but that’s
what's going on in the background whenever you buy or sell. Buying and selling only accounts
for a small portion of the stock market though. Most people simply hold onto their stocks
for years if not decades, so what happens to shares that are simply held. Well, the
DTC will give each of their clients a certain amount of rights to their shares. For example,
clients will retain voting rights, the right to use the shares as collateral, and the right
to buy and sell options using the underlying stock. The DTC will also process dividend
payments and ensure that each client is paid out appropriately. In essence, the DTC basically
takes care of everything. I think it’s pretty clear why banks prefer this over trading billions
of stock certificates per day.
DTC AFFILIATION: All of this still leaves the question, is
your brokerage or bank associated with the DTC. Well, if you live in the US, the answer
is yes. Unless you keep your money in some obscure offshore bank, it’s almost a certainty
that your brokerage and bank works directly with the DTC. The DTC does publicly post all
the institutions they work with, so you can go check out this list if you’re interested.
But the easiest way to identify affiliation with the DTC is to simply check if your brokerage
allows for transferring to or from other brokerages. Brokerages don’t wanna complete transfers
manually especially for customers that are leaving. So, if you have the ability to easily
transfer to another brokerage, it's because the brokerage simply offloads the transferring
responsibility to the DTC. Just because your brokerage is associated with the DTC though
doesn’t mean that it’s impossible for you to get a stock certificate. It is nearly
impossible as brokerages put up as many roadblocks as they can, and I really don’t recommend
that you try to do this. But if you want the certificate for novelty purposes or something,
you can ask your broker and they’re required by state law to give you your certificate.
The process will likely take months, you’ll probably be charged hundreds of dollars, and
you’ll end up spending hours on the phone with your brokerage, but if you’re super
persistent, you should be able to get it. This too is changing fast though, and it’s
just a matter of time until it’s impossible to get a stock certificate. In the UK, for
example, stock certificates will no longer be a thing starting in 2025. This is really
nothing to worry about as it's simply the far overdue digitalization of this part of
the industry. But, as you would guess, this has sparked a lot of conspiracies regarding
the DTC.
CONCERNS & CONSPIRACIES: Before we put on our tin foil hats, let’s
discuss some legitimate concerns with Cede & Co. First of all, given the sheer volume
of money Cede handles, it’s possible that an insider steals some of that money. Stealing
$1 billion from Cede would be like stealing $1 from someone who has $54,000. Stealing
$10 million would be like stealing 1 cent. Cede only has 12 directors and half a dozen
employees, so theoretically, it wouldn't be that hard for insiders to collude and steal
serious amounts of money. Again, this is improbable, but seeing cases like Bernie Madoff, it is
possible. The other more serious concern is illegal short selling. The process is super
convoluted and technical, but in essence, hedge funds are able to leverage the DTC’s
settlement time and borrowing program to engage in naked short selling which is illegal. This
problem can probably be addressed by some changes in regulation, but the government
is too lazy to do anything about it until it actually leads to some sort of tangible
consequences. So, in the meantime, the DTC is unintentionally enabling naked short selling.
And finally, the third major concern is that there’s very little transparency from the
DTC. Given the scale of money that they deal with, all of their activities should be public
knowledge and heavily scrutinized. But, only the DTC and their banker clients have access
to DTC’s daily activities. Making this information public wouldn’t necessarily prevent a well
thought out scheme from taking place, but it would reduce the chances. Anyway, moving
onto the conspiracy, some people believe that Cede & Co is owned by the billionaires of
the world and used to crash the stock market for their benefit. Cede & Co is a private
company and it’s officially owned by its clients, but some believe that these clients
are actually just a handful of powerful families like the Rockefellers and the Rothschilds.
There seems to be some sort of unverifiable evidence that these families have stakes in
the company, but even if they did, it doesn’t have to be nefarious. If you were rich, you’d
probably deal with the DTC directly as well instead of going through brokers. Another
piece of evidence that’s used to propel this conspiracy is that in the early 1990s,
Jim Mcneff who was a director at the DTC, told the media that the DTC’s first controlled
test was 4 or 5 years ago. This means that he was probably referring to Black Monday
and the stock market crash of 1987. Trading volume is generally the highest during stock
market crashes because investors are most emotional during these periods. In 2007, for
instance, the DTC settled transactions that were worth $513 trillion. So, I’m pretty
sure Jim was just referring to testing if the DTC could efficiently handle that much
volume. But, conspiracists believe that Jim slipped up and accidentally admitted to causing
the crash. Now, is the DTC intertwined with a bunch of hedge fund and market maker manipulation
games? I’m sure they are. But Do I believe that the DTC is a conspiracy organization
created specifically to crash and pump markets, no not really. And even if that is the case,
it’s not like we can do anything about it. So, it’s probably best to not look too into
it, but that’s just what I think. Do you guys think Cede & Co is involved in nefarious
activities? Comment that down below. Also, drop a like if you’ve never heard about
this company till now. And of course, consider joining our discord community to suggest future
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