The Basics of Brokers 

What is a Broker in Capital Markets?

A broker usually charges a fee or commission for executing orders submitted by an investor. In a capital market, brokers may also provide investors with research, investment plans and market intelligence.

Who does a Broker represent?

Above all, a broker represents the client, either an individual or a company and acts on that principal’s behalf. The broker enters into trades in stock exchanges on behalf of his clients. Therefore, a broker can represent a range of different companies – ranging from banks to hedge funds, asset managers, insurance companies, CTA (commodity trading adviser), private equity firms, etc.

Types of Brokers.

Brokers supply a range of services to different clients, depending on the product they supply. There are a lot of different commodities that brokers can trade in, therefore there are automobile brokers, business broker, commodity broker, customs broker, insurance broker, intellectual property broker, real estate broker, stockbroker, etc.

Alongside the different types of brokers, there are also three main types of brokerage firms: full-service, discount, and direct-access.

• Full-service brokers are firms that offer the largest assortment of diversified financial services and usually assign a licensed individual broker to each client for a higher commission.
• Discount brokers – with smaller commissions for trades, these brokers provide independent research, mutual fund access, and basic banking products.
• Online brokers (direct-access brokers) – with the smallest commission, these brokers cater to active day trading clients to provide direct-access platforms to electronic communication networks (ECN), market makers, specialists, and multiple exchanges.

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Brokers vs Sub Brokers

A broker, as explained above, is an agent that executes buy and sell orders of a client, however, in Capital Markets, some sub-brokers are an important intermediary between broker and client. A sub-broker is appointed by a broker and acts on behalf of a trading member, assisting the investors in buying, selling or dealing as an agent but he is not a Trading Member of the Stock Exchange.

Main Characteristics and Obligations of a Broker

Brokers are expected to have the best standards and execute trades as well as they can for clients, therefore they need to have particular qualities to ensure the success of a transaction. These include but are not limited to:

• Excellent knowledge of the market
• Technical, legal and professional knowledge
• Clarity and transparency
• Success and focused attention
• Skilled communicator
• Organized and available
• Loyalty
• Honesty
• Support and reassurance

A broker owes their clients a duty to apply skill, care, and judgment to a reasonable standard to avoid economic loss. They further need to uphold certain responsibilities/ obligations to their clients. These include:

• Good faith and fair dealing – brokers must conduct their business in a manner that reflects honor and integrity. Brokers may not trade securities in your account, without permission, excessively trade to increase their commission or use your funds or securities without organization.
• Know the customer – brokers must learn about their customer’s financial conditions before making any investment recommendation.
• Suitable recommendations – investment recommendations must be consistent with the customers’ financial condition, investment objectives, and risk level.
• Duty of loyalty – brokers must put their customer’s interests first.
• Obligation of disclosure – brokers must be truthful in their dealings with customers and disclose to them material information reasonably related to an investment decision.
• Authorization for trading – brokers can only execute trades to the extent they have received permission to do so.

What are the European Regulations for a Broker?

The ESMA (European Securities and markets authority) approve and publish regulations that have to be accepted and adopted by all the markets in the EU. Moreover, the ESMA aims to protect the client’s investments, ensure financial security and to detect risks or potential problems.

The MIFID (markets in financial instruments directive) further regulates the different European stock markets and the instruments in which they trade. This provides European investors with the same level of information and protection regardless of which country they are trading in within the EU. Although this regulation is fairly new and only came into force in 2004, the benefits are numerous: improved legal playing field and a safer, sounder, more transparent and responsible financial system that works.

Additionally, there are regulations particular to a country but which all have the same aim of maintaining transparency and order in the markets whilst protecting investors and the interests of the national economy. For example, in Spain, there is the National Securities Market Commission (CNMV), in the UK the FCA (Financial Conduct Authority) and FINMA in Switzerland (Swiss Financial Market Supervisory Authority), to name only a few.

What is a Regular Day in the Life of a Broker?

A broker will work from 7 am to 6 pm collating orders from clients and trying to match orders whilst providing the best execution. The day is all about trading, so it is extremely fast-paced and quite long. They begin researching and contacting their network of clients to discuss their portfolios and plan for what to buy and sell. The stock exchange opens at 9:30 to 4 pm.

What is a Dealing Desk (DD) Broker?

Also known as a market maker, a dealing desk broker is a broker that literally “creates a market” for their client, meaning that they take the other sides of a client’s trade, by setting the bid and ask price and waiting for a trader who would like to take advantage of these set terms. These brokers profit by buying at lower prices and selling at higher prices.

What is a Non-Dealing Desk (NDD) Broker?

Often referred to as ECN (electronic communications network), non-dealing desk brokers do not pass their clients’ orders through a dealing desk but rather work with liquidity providers to give their clients variable spreads and to match traders with other traders. This means that they do not take the other side of their clients’ trade as they simply link two parties together and charge a very small commission.