Picture the scene if, at the end of each
trading day, all the shares that had been bought and sold were
physically moved from brokerage firm to brokerage firm in exchange
for checks, as they once were.
That's not what happens today, thanks
to a practice called netting. Using an automated system, NSCC
nets down, or reduces, the number of trading obligations that
require financial settlement to just 3% of the total by matching,
or offsetting, transactions in each individual security reported
by each firm.
How netting works
For example, all the shares of XYZ that a firm's clients
purchased are offset against the shares of XYZ that other clients
of the firm sold. These offsetting transactions can be cleared
within the firm, or within the various firms using the same clearing
firm, by simply reallocating ownership of XYZ shares. Those trades
could cancel each other out exactly — though it's unlikely.
The small percentage of trades that aren't
offset require another step. The firms with net short positions
— whose clients sold more shares than they purchased of
a particular stock — deliver the required number of shares
to NSCC. More precisely, the shares are debited from the firm's
account at DTC and delivered to the NSCC account. NSCC then credits
those shares to firms with net long positions, whose clients purchased
more shares of the stock than they sold.
