Brokers

Brokers

1. Function

   • Arrange trades for clients
   • Clearing and settlement among traders**
   • Provide access to exchanges
   • Provide access to dealers
   • Expert traders
   • Principal-Agent Problem
     • Performance measurement difficult
     • Agency responsible for brokers
     • Conflict of interests
     • Order preferencing certain dealers (may not be best execution for client)
     • Honesty leads to good reputation = firm survival

2. Market type

   • Order flow
     • Small to medium size trades
     • Order driven or quote driven
     • Receive orders and match with orders&quotes
   • Block
     • Large size trades
     • Brokered
     • Receive order on one side, search for opposite side
   • New and Seasoned Offerings
     • Large size corporation trades
     • Brokered
     • Sell securities to buyers on behalf of issuers and holders
   • M&A
     • Company to company trades
     • Brokered (investment banks)
     • Find one or both parties

3. Firm Type

   • Full Service
   • Discount
   • Deep Discount
   • Diff: Commission, Research, Advice and Services

4. Firm Structure

   • Front office operations
   • Back office operations
   • Proprietary operations

5. Sources of Profit

   • Commissions
   • Payments for order flow
   • Interest
   • Short interest rebate
   • Underwriting, M&A & security lending fees
   • Brokerage and commission recapture