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I am a bit confused as to why DTCC is needed in the market. For instance, if I want to buy (as a retail investor) a stock listed under NYSE, does my broker ever have to deal directly with the NYSE or is everything performed by DTCC? How is it that the NYSE is not the entity that transfers entitlement from a seller to a buyer? What does the NYSE does exactly? Because until finding out about the existence of the clearing corporation, I assumed Stock Exchanges existed to do exactly what DTCC does.

I understand the need for ensuring that the trades are going to go through in terms of liquidity and the existence and location of the assets, etc, so traders can feel safe about transactions. My problem is I used to think this was performed by the Stock Exchanges, and I fail to see why a separate entity was needed.

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Think of it as the difference between SMS and spreadsheets.

The stock exchange is a messaging platform. It publishes, at light speed, the bids/offers that are open, and data about the trades that have closed. It has no idea about the actual existence and location of the assets. It’s just a place for placing bids and closing offers on those bids. Its output at the end of a trading day is a list of trades.

Then it’s on the brokers to settle those trades, i.e. to deliver actual shares to the correct brokerage account. The DTCC’s job is to reduce the cost of settlement by doing it all in one location. They perform the bookkeeping and settlement. They keep track of the brokers who own the shares. They hold shares for brokers, and facilitate the transfers between brokers. However, they operate on a much slower timescale, currently settling transactions over 2 days.

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