Types of Brokers

When a customer wishes to purchase a security, she contacts her broker and places the order. The broker may work for an introducing broker-dealer, which is a broker that focuses on attracting investors and soliciting orders and simply “introduces” the customer to another broker-dealer that actually executes the trade.

The broker that executes the trade is called either an executing broker-dealer or a correspondent executing broker-dealer. After executing the order, the executing broker-dealer passes the order to a clearing broker-dealer, also called a clearing firm or a carrying broker-dealer. Clearing broker-dealers handle customer orders and accounts and keep custody of the funds and securities of their customers. They handle the recordkeeping and make sure orders are correct. Securities Exchange Act Rule 15c3-1 requires that a carrying firm have at least $250,000 in net capital. Firms that carry customer accounts but do not hold customer funds or securities must keep $100,000 in net capital. Introducing, executing, and clearing broker-dealers are usually all separate firms.

An introducing broker may choose to not receive securities, but if it does receive customer securities, it must promptly forward them to a clearing firm

Clearing agreements, also called carrying agreements, are contracts between introducing or executing firms and clearing firms. The agreement gives the responsibility of clearing a transaction to the clearing firm. Clearing agreements allow broker-dealers to enter the industry and provide full service to their clients without bearing the large start-up and maintenance costs needed to clear customer transactions. FINRA requires that carrying firms be FINRA members and that the responsibilities of each party be spelled out in the agreement.

Every broker-dealer that executes trades must either be a clearing firm itself or have a written agreement with a clearing firm. Very few retail broker-dealers, meaning