It is indeed confusing. It took me several months to figure this out!! To get a better picture, you must understand the MArkets i.e there is central figure called DTC, Depositary Trust Corporation. This is the entity that is the master reference of all Broker Dealers. The sum of the book entries (for a particular share) of all Broker Dealers must tally with the Books of the DTC. This is called the settlement process. For example let us a company XYZ has just been listed in the market with 100 shares. And there are 10 broker dealers each carrying 10 shares in the inventory. The sum of the shares of the 10 BD will equal that in the DTC books - 100. Keep in mind that the DTC keeps an exact copy of the BDs books.
Now there is another role that needs to be understood and that is the TA, Transfer Agent. Initally when the shares are release the TA makes sure that the DTC receives the MAster total 100 and each of the 10 BDs receive 10 shares.
Now let us say on Day 1, 10 shares are traded i.e the BD1 sells 10 shares to BD2. BD1 books willnow carry 0 and BD2 books will now carry 20. On day 4 the book entries are tallied with the DTC book entries. this is called the settlement process. So now DTC master will show 100, however BD1 in DTC books will show 0 and BD2 will show 20. When this is done, one can now say the books are balanced.
I hope you are with me thus far. If so then next paragraph will be a piece of cake!!
In reality what does happen is that the BDs create a phantom supply and demand i.e a fantom buy/sell transactions. by phantom I mean the book entries in the BDs books are never tallied with those of the DTC (remember book entries must be tallied after 3 days for every trade). So they create an imaginary buy/sell market. It does not affetc them at all but it does affect the individual investor who cannot see the phantom market i.e if they create a sell pressure then the individual investor thinks the stock is being dumped and hence will sell all his/her shares.
O.k that's my understanding.
