A broker is a person who facilitates either buying or selling of an asset. The asset can be either tangible objects which have innate value like land, cars, houses, and many other objects that have innate value. The object can also be certificates of contract that do not have innate value but have value because of the economic transactions they represent. Such an object of the trade includes options that are valuable only because they hedge the investor against losses, but the paper, which represents the value, does not have innate value. Other items of trade are those that are intangible such as stocks, but are traded virtually through the stock exchange market. Brokers are important in the capital market because they connect buyers and sellers of physical assets while they are important in the securities markets because they connect buyers and sellers of financial instruments of securities. Financial instruments of securities are financial tools that transfer financial resources from lenders or savers to borrowers or investors and also transfer risk from those that are unable to bear it to those that are well equipped to bear it. Financial instruments that transfer value include bank loans, bonds, home mortgages, stocks, and assets backed securities. Financial instruments that transfer risk from those unable to bear it to those who are able to bear it include insurance contracts, futures contracts, and options. The brokers facilitate the transfer of physical assets and financial instruments of securities between buyers and sellers in the capital market and the financial market at a commission or at an advisory fee. The difference between advisory fees is that the commission is usually charged after each and every transaction, be it buying or selling, while an advisory fee is normally charged as a tax on the account balances annually. The broker and the investor usually agree on which one to charge based on their terms of trade. Most people use the terms dealer, broker, and a broker-dealer interchangeably. However, these terms do not represent the same individuals because they perform different functions in the financial market and capital markets. A broker finds a buyer or seller a counterparty to exchange with while a dealer acts as a counterparty to link the buyer and the seller. A broker-dealer, on the other hand, can find a buyer or seller a counterparty and can also act as the counterparty to link the two. Even though the buyers or sellers perform the function of buying and selling, they operate differently since they deal with different types of physical capital and financial instruments of securities. Therefore, there are different types of brokers. There are four main types of brokers: stockbroker, full-service broker, forex broker, and discount broker. I will give an outline of their differentiation below.
The brokers can also be grouped by the way they execute orders. Using this framework, they can be grouped into dealing desk brokers [DD] and no-dealing desk brokers [NDD].
ü Electronic Communications Network broker: These are brokers link the orders of the opposite counter-parties by seeing the list of security orders they have and match them with their suitable counterparty. The broker charges a small commission fee for their services,
ü Straight Through Processing broker: These brokers usually connect their client orders to their liquidity providers. They usually have many liquidity providers and pick the one who is offering the juiciest deal. This broker usually profits from a margin only that their spread is usually way lower as compared to that of the Dealing Desk Broker.
Other types of brokers include:
Commodity Broker: A commodity broker is a type of
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