What Is a Cage?
Today, most investors hold their securities in street name, meaning they don't have to hold physical possession of their certificates. All things being equal, these archives are stored by their brokerage firm, consequently expanding convenience and diminishing the risk of theft.
How Cages Work
To guarantee that the ownership status of their clients' securities are recorded and kept up with, brokerage firms keep cages inside their offices to guarantee these physical certificates are secured. Assuming that these certificates are taken or lost, their owners might not be able to demonstrate their ownership rights. To safeguard against this risk, brokers' cage departments frequently feature advanced security measures. Their general vault-like appearance made them become known as the firm's "cage".
Today, it could come as a shock for most investors to realize that such departments actually exist. All things considered, since the approach of completely electronic trading services, it is at this point not important to experience any physical securities certificates to invest in stocks or bonds. All things being equal, investors who purchase stocks today quite often have those stocks held in the street name of the broker as opposed to under the personal name of every investor. This means that the securities stay registered on the brokers' books like they have a place with the brokerage firm itself. In any case, extra records inside the brokerage firm lay out the investor as the [actual owner](/genuine owner) of the securities.
This method of investing electronically utilizing the street name of the brokerage firm offers many benefits over taking physical possession of the security certificates. As well as diminishing the risk of theft, electronic investors can likewise execute purchase and sale transactions definitely more rapidly than if the exchange of physical securities were involved. Without this improvement in speed, certain styles of investing, for example, day trading or high-frequency trading (HFT), would be unimaginable.
In the past, investors who feared losing their physical security certificates would purchase indemnity bonds to safeguard themselves against this loss. These bonds would commonly cost around 2% or 3% of the market value of the securities covered. This increased carrying cost of physical certificates is one reason why electronic securities settlement has become so common.
Real World Example of a Cage
In recent many years, the quantity of physical certificates utilized in securities trading has consistently declined. Before the approach of electronic trading organizations, brokerage firms depended on dispatches physically shipping stock certificates to and from the pertinent financial institutions. By the late 1960s, be that as it may, the sheer volume of desk work engaged with these transactions caused a period of high-profile administrative errors.
One such outstanding event was the alleged "Administrative work Crisis" that grasped Wall Street, in which criminals managed to take more than $400 million of security certificates. This period of chaos urged the industry to embrace new mechanical arrangements, for example, the street-name registration method that is broad today.
- Today, by far most of security trading is done electronically, bypassing the requirement for physical transfers.
- Cages are the departments of brokerage firms that keep track of physical securities certificates.
- In the past, cages were far reaching and vigorously utilized, as all transactions required physical certificate transfers for settlement.