It's changed over the years. It used to be possible for casinos to cancel their own chips by drilling or notching. I don't know when this changed. Also, I believe just common machine tools like a drill press or grinder was used in the casino's cancellation process. There seems to be no consistency in the size of the holes or the placement or depth of the notches.

Now days, the chip maker is usually called on to cancel chips. I believe the cancelled chips are returned to the casino and Gaming is notified so they can enter the change in chip quantity into their records. I don't know the exact process for the cancelled chips getting into collector hands. I do know that when Paul-son was an independent company and when they had retail stores, you could often find cancelled chips for sale in the store. I don't know whether they bought the chips from the casino to resell at retail or whether it was just assumed that nobody cared about cancelled chips so there was no tracking of them. The most common type of chip found cancelled in the Paul-son store was the large gold hot-stamp than had been applied over the inlay.

If Gene sees this, he can probably add more history and answer your question more completely.