of a stock clearing house is illustrated in Figure 4. While each of the brokers inFigure 4 have multiple customers, some buying and some selling, each broker can report all of his trades in each security to the stock clearing house. When these have been matched by similar reports from other members of the clearing house, each broker's position for the day in a particular stock is calculated and he either delivers or receives stock in accordance with his net balance position for that day. His financial position with respect to all trades for the day can be balanced across all securities and he can either pay to the stock clearing house or receive payment from the stock clearing house to balance his financial account.

Two different practices exist in the United States with respect to deliveries of the stock certificates when a stock clearing house is involved. Under the practices prevailing in New York, where it is used by the clearing corporation for the New York, American, and over-the-counter exchanges/markets, the member of the stock clearing house is directed to make his deliveries of particular stocks to other members of the clearing house and receive deliveries of stock in other securities from other members of the clearing house. Under these circumstances the stock clearing house itself neither receives nor delivers certificates, but simply directs its members to deliver or to receive from other members. The other method of stock clearing through a clearing house is for all deliveries of certificates to be made to the clearing house and all receipts of certificates to be received from the clearing house. The latter method is used by the stock clearing house for the Pacific Coast Stock Exchange. In theory, the use of a stock clearing house enables a broker to reduce a large number of trades in N securities to a single settlement for each of the N securities each day and also reduce the large number of financial transactions required by direct clearing to a single financial transaction with the stock clearing house. Large broker/dealer houses realize a considerable saving in work through the use of a stock clearing house, while small broker/dealers who have no more than one or two trades in any given security in the course of a day realize little or no saving in work by participating in a stock clearing house.

After receiving notice of all sales and purchases from its members for a day, the stock clearing house verifies the accuracy of these reports by one method or another and then issues a report to each member about his net balance in shares for each stock traded that day. This "net balance order" is settled with another broker/dealer or with the clearing house itself in essentially the same manner that a single trade is settled by direct clearing. When the stock clearing house does not actually receive and deliver certificates itself, it may act as a central place for its members to exchange certificates.

TRANSFER AGENTS IN THE CLEARING SYSTEM

After the buying broker has received stock certificates on behalf of the buyer, he may send them to the transfer agent so that the old certificates may be destroyed and new ones issued in the name of the new owner. By this means the new owner becomes a shareholder of record and the corporation may then distribute dividend checks and stock dividends directly to him. Sometimes the shareholder wishes to remain anonymous, and the buying broker will hold the certificate for the buyer in the buying broker's "street name." In either event, it is likely that the transfer agent will receive the old certificate and issue a new one.

Since the definition of a fail as used by Arthur D. Little, Inc., in this study assumes that the trade has cleared when the buying broker receives certificates from the selling broker, the activities of the transfer agent cannot directly affect whether or not a particular trade or balance order fails. In practice, however, the selling broker may not receive the stock certificate from his customer in time for the delivery to be made to the buying broker. In those circumstances the selling broker will borrow certificates, such as from his own account, and deliver them to the buying broker. If the transfer agent uses an appreciable amount of time to transfer title, the supply of stock certificates actually held by broker/dealers will decline and-it is argued-will affect the rate of fails for that security. This guessed cause of fails is discussed further in the next chapter.

INTER-REGIONAL TRADING

Shareholders of U.S. and foreign businesses who live in the United States are widely dispersed geographically. While their geographical distribution may not reproduce in miniature the distribution of the general population, wide dispersion nevertheless is still a feature of the geographical location of shareholders in the United States. As a consequence, orders to buy or to sell originate throughout the United States. For listed stocks, the orders are transmitted by the broker/dealer to the city in which the exchange is located. The trade is executed on the exchange and the stock is cleared between the buying and the selling broker. The buying broker then must arrange within his own organization to deliver stock certificates to the buyer.

In over-the-counter trading, the selling broker/dealer may actually trade with a market-maker who is geographically located in a distant city. In these circumstances both the trade between selling and buying brokers and the settlement between seller and buyer have spanned large geographical distances.

When the stock certificates are being transported over large distances, it is common practice for the selling broker who receives the certificates from the seller to deliver them to his bank in the same city in which his office is located.

The selling broker's bank then "drafts" the certificates to another banion the distant city, perhaps the buying broker's bank if it is a direct clear. That ank in turn delivers the certificate to the buying broker. Thus in inter-city clearig it is often the case that two additional parties are introduced in the clearing rocess. Direct clearing in inter-regional trading is described diagrammatically in Fire 5. This picture becomes even more complex if banks are involved in the trasfer of certificates between two offices of the selling broker and then involved gain in the transfer of certificates between two offices of the buying broke: It is intuitively clear that it is nearly impossible to transfer the actual cercates submitted by the seller through such a system to the buyer in anything even approaching the industry's standard of five business days to accomplish settlement.

The flow of money in the inter-city stock clearing process further ilrates the important role of banks in the stock clearing system. The selling brokers aank will loan money to the selling broker on the basis of having received the eiler's stock certificates. The selling broker then pays interest on the loan uni the selling broker's bank receives payment for the certificates from the fuying broker's bank. The function which the banks perform in transmitting morey in the stock clearing system is an important one which any revised stock, caring system must also perform.

Large broker/dealer houses which accept orders to buy or sell from customers in Minneapolis or Miami or Spokane and actually execute these orders the New York Stock Exchange find themselves, perhaps with the help of their bankers, operating an inter-regional stock clearing system. By observing a ransaction in such a house in New York City it appears-unless one does extensive work-as if the sell originated in New York and the buy originated in New York. In fact, some of the sells and some of the buys originate outside New York. The difficulty of observing inter-city trading of stocks, particularly of listed securities, by examination of routine records maintained by broker/dealers needs be understood. Nevertheless conceiving a study of inter-city trading is useful, perhaps without ever doing it, because it recognizes inter-city stock clearing as an important part of the stock clearing system and allows a conception of the potential role of clearing houses in inter-regional clearing..

THE INTER-CITY AND INTER-REGIONAL STOCK CLEARING SYSTEM IN THE UNITED STATES

It is essentially correct to say that each exchange in the United States has associated with it a stock clearing house. In general, members of the exchange are also members of the clearing house. Stock clearing for the exchange is done in the city in which the exchange is located. For example, stock clearing for both the New York Stock Exchange and the American Stock Exchange is located in New