Drawbacks of Custody-Only Trading

The biggest drawback of custody-only trading is that it theoretically sacrifices some level of liquidity and efficiency. It takes more work to buy and sell shares. Investors with a particular strategy may find this downside is made up for by the prohibition against naked short selling.


Another issue arises because custody-only securities are not eligible for Depository Trust Company (DTC) nominee registration or for DTC book-entry services. However, DTC does allow for the deposit of securities under different methods; these apply to specialized asset classes such as customer-registered custodial assets, restricted shares, private placements, and limited partnership interests.

The Depository Trust Company (DTC) is the world's largest securities depository. Founded in 1973, it is a trust company that provides safekeeping through electronic recordkeeping of securities balances. It also acts as a clearinghouse to process and settle trades in corporate and municipal securities.