Honest question, and we're heading into conspiracy land. Is a brokerage legally required to purchased the stocks that I own?
Here's my fear (in analogy form):
Let's say I have a friend named Charlie who buys and sells stock. He's a good friend of mine, and we occasionally do business together. One day, I tell him I want to purchase $10,000 of XYZ stock, and he agrees to help. He buys those stocks immediately, and tells me he will stores them for me and keep them safe.
However, he doesn't actually purchase the stocks. He just takes my money, and agrees to take on the risk of payment. Now, I would imagine it's in Charlie's best interest to do this deal because
- the stock I purchased is absolutely garbage and he gets to keep the money if it goes down (it's essentially a short) and;
- he gets to USE my money to purchase other securities. He's batshit rich, so even if the stock goes up and he has to pay it's essentially pennies to him. Why wouldn't he take my money for free?
The third benefit to doing this is slightly hidden … maybe he has a group of friends that are doing the same thing for other people. And by not purchasing the stock, it keeps the cost to borrow for the stock down and it allows people to continue naked shorting.
The problems I see with this situation, if it were true, is that it creates a conflict of interest. If I start making money, he'll come knocking at my door because he is the one losing money. And it also doesn't effect the actual stock. Stock is determined by supply and demand after all … which is kind of a big deal.
Anyway, just asking questions. Appreciate any help and sources.
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