August 21, 2012
i am wondering what segregated funds are, in a brokerage.
it appears to me that, in a bankruptcy, there are no segregated funds because all customers share in any assets left after secured creditors, share and share alike. i can understand that margin customers actually take a loan from the broker to buy things at a percentage, but they share with the cash customers at the same rate. in a bankruptcy, the margin customer has to put up their remaining margin to own their portfolio and if they cannot, some of their position must be sold. but cash customers don't put up any remaining margin because their position is a 100% cash position.
this is a contradiction of terms, segregated funds vs. what happens in bankruptcy.
a broker should be an agent, not the principal. i don't think i signed anything with my broker that indicated that my broker OWNS my portfolio.
the brokers have been working on this title deal so that they OWN their customers' portfolios, so that the broker can get stock "in street name" to enable trading. but this doesn't mean that this is right, permitted by the customer. this doesn't mean that brokers can loan my securities to someone else (even if that someone else is my broker). my broker should not be able to short against any orders that i request, whether through their own brokerage or through a dark pool or through the stock market itself. this would be fraud because my order would not be delivered to me and the broker does not have my permission not to make sure my securities were delivered. naked shortselling is illegal. you cannot enable brokers' naked shortselling. it is naked shortselling if the broker cannot produce my portfolio and it means that the broker did something illegal and the broker is maybe insolvent.
it doesn't matter if a broker shorts an ETF, thereby shorting all of the stocks in the equity but not borrowing shares, not having to attend to market deadlines themselves. shorting an ETF is naked shortselling as well. an ETF is only a derivative, because they derive their value from underlying equities.
i have noticed that banks and brokers carry segregated amounts in their assets and liabilities. i do not know why this is so, if they are agents. the customers didn't buy stock in the bank/broker. the customers don't have the information to be able to tell whether the bank is solvent, particularly with "off-balance sheet" items.
btw, the PCAOB schedule to look at broker audits is way too slow. they are probably handicapped by a lack of funds. i don't think customers should have to wait until year 2032 to know whether they own the stock in their portfolio. and i think the audit report and financials on their broker should be available to the customers, the broker's customers appear to bear a degree of risk when dealing with a broker. the PCAOB needs more funds so that they can do a proper job of auditing and educating their membership about how to do a brokers' audit. i don't know what is so difficult about audits, but apparently standards were relaxed some time ago and auditors have been complacent. or maybe auditors don't know what the SEC standards are. or maybe auditors have been just rubberstamping what the brokers do, what instruments the brokers come up with. you know, there are really no new ideas, just applications of older ideas. worse, the SEC has been enabling brokers with high frequency trading, derivatives, without examining the foundation of those ideas.
please clarify this for me.
suzanne hamlet shatto