Broker

Quick definition A broker is an intermediary that executes customer orders and provides trading services. Brokers do not typically hold inventory (unlike dealers); they match buyers and sellers. What it is Brokers handle multiple functions: - Executing customer orders (routing to venues) - Providing financing (margin loans) - Custody of client assets - Compliance and reporting - Market research and tools Types of brokers include retail brokers (serving individual investors), institutional brokers (serving hedge funds and asset managers), and prime brokers (serving hedge funds with financing and operations). Broker versus dealer A broker connects buyers and sellers (no inventory). A dealer holds inventory and buys/sells from their own position. Brokers make commission; dealers make spread. Most modern brokers are actually "broker-dealers" that do both activities. Why it matters Brokers are critical intermediaries. They provide access to markets and execute the critical function of order routing. A broker's quality determines whether you get best execution or poor execution. Brokers also provide financing and risk management services essential for institutional trading. Retail versus institutional brokers Retail brokers cater to individual investors with user-friendly platforms and low minimums. Institutional brokers serve large funds with sophisticated tools and prime brokerage services. Retail brokers often internalise trades (match customer orders internally) while institutional brokers route to exchanges or dark pools. Prime brokerage Large hedge funds use prime brokers who provide: - Margin financing - Securities lending - Operations and settlements - Multi-prime routing Prime brokerage fees are substantial but essential for large funds. Practical example You open an account at a retail broker and place an order to buy Apple. The broker executes the order by routing it through a venue (or internalising it). You hold the shares; the broker is your custodian. You margin borrow 50 percent of the position from the broker. The broker charges interest on the loan. Regulation Brokers are regulated by FINRA and the SEC. Brokers must maintain minimum capital, follow best execution rules, and protect customer assets. See also - Market Maker - Dealer - Broker-Dealer - Prime Broker