The End of Stock Certificates

Clearing firms putting final squeeze on physical certificates

Greetings from BD Exchange,

Over the last two years we have been warning readers in print and in speeches at financial conventions of the looming clearing crisis. We had been giving tips for clearing stock certificates that are in physical form from the issuer and despite our warnings; it appears the end game in now in site. Recently the last few firms that actually still accepted physical certificates of low priced securities have been going through rather rough times from a financial and regulatory perspective. One of the largest clearing firms in the country is now trading at penny stock levels, while the others are facing huge charges from DTC over liquidity and other issues. In one case, a well known clearing from just put a moratorium on accepting physical certificates. For some strange reason, we still get dozens of calls per week from members wanting to hire us to help them find the right clearing firm that can handle the deposit and clearance of low priced stock certificates. Apparently the newsletters, speeches and interviews with publications have not been getting our point across so we are going to put it bluntly for all to understand:


Despite this we still receive calls from client’s asking why not or giving new ways the firm can accept them. In order to avoid further confusion we are going to explain why the clearing firms and DTC do not want your stock certificates. DTC is a behind the scenes, members only, all male club that literally prints money every day. They have spent hundreds of million of dollars on computers and software systems designed to streamline everything and make all functions as electronic as possible. In the new DTC world, they want to receive an electronic file from a large clearing firm that has 50,000 fully and accurately executed trades. This file goes into their computer system and hopefully each and every trade and contra side matches and within minutes DTC can find any trade breaks and notify the clearing firm via electronic message of the out of balance. Within 24 hours the clearing firm matches the break and PRESTO! 50,000 executions are done and accounted for and DTC has automatic charges on each and every share/execution and the cash printing machine continues to roll on.

Now let’s contrast this with the physical submission of an overnight delivery by the clearing firm of a stock certificate for 2 Billion shares of a company nobody has ever heard of that trades for 2 cents on little or no volume. First DTC has to get the paperwork to make this thing eligible and now they have to review a myriad of paperwork sent in by the clearing firm including legal opinions, stock powers and all the other legal jargon paperwork to prove that this piece of paper is actually valid. While this is going on, brokers are calling the clearing firm each and every day demanding to know when this stock will clear and when can they sell. DTC usually communicates via their interface with the clearing firm but sometimes receives incessant phone calls from the clearing firm. Assuming DTC finally does clear this stock there is the little issue of volume on the stock. DTC has just made 2 billion shares of some unknown stock available for sale to the pblic but the average daily volume on the stock is 1500 shares. Can anyone blame them for being concerned about the legitimacy of this stock? Let’s assume that 2 billion shares of this stock get sold at one or two cents. The dollar amount or face value of the sale is NOT THE CONCERN. The big concern is if this thing somehow comes back as illegitimate or the SEC halts the stock or decides the registration statement was insufficient. The real worry for DTC and the clearing firm is going into the free market and buying back 2 billion shares of a one cent stock that had an average volume of 1500 shares a week ago. Once word hits the street of a short squeeze traders around the world will be buying the stock knowing that DTC is going to make the clearing firm buy 2 billion shares within the next ten days. This can put not only the clearing firm out of business but put a significant dent into DTC’s profits, thus illiquid charges and mark to market and risk charges are slammed on the clearing firm. Unfortunately clearing has been very rough the last few years ago and the smaller clearing firms do not have the capital to meet these calls so they are just refusing the business.

We have received numerous calls from brokers who complain about the various policies being put into place and who believe that DTC and the clearing firms should do multiple things to protect themselves. To that I always state that when you hand your clearing firm a piece of paper for some unknown company in Canada you should simultaneously put up a promissory note for the deed to your house at the same time. This way if the stock is bad, you will also lose your home. Amazing how nobody wants to do that but they basically want the clearing firm and DTC to take that risk.

What can be done? At this point there is little or nothing the small clearing firms can do. The larger ones can easily take this business but they do not want this type of business. We would once again submit that the actual issuer is the problem. Instead of printing stock like the fed reserve prints money, they should be reversing the stock, get out of the practice of handing millions of shares out to every stock promoter in the world and instead have fewer shares and a higher price. Some of you ( and I know who you are) will roll your eyes and come up with more excuses but at the end of the day while you are being stubborn the end of low priced stock certificates is here and you will be left out in the cold.

What do you think? We’d love to hear from you.