Part 13

Tarheel Consultancy
Services
Corporate Training and
Consulting
1
Part-13
Brokerage Operations
A Macro View
2
Structure of a Brokerage
Firm
 The activities of a brokerage firm
can be broken into three broad
categories:
 Front-Office Operations
 Back-Office Operations
 Proprietary Operations
3
Structure (Cont…)
 All activities that involve client
contact take place in the front
office.
 These tasks include the soliciting
and taking of orders; execution of
trades; and provision of
investment advice.
 Back-office operations include
supporting activities. 4
Structure (Cont…)
 The back-office clears and settles
all trades; maintains accounts,
produces research reports; and
creates and operates information
systems.
 Proprietary operations include cash
and risk management; and
speculative deals on account of the
firm itself. 5
The Front Office
 Brokers solicit order flow by
advertising and by calling
prospective clients.
 They also provide potential clients
with extensive investment
information and research inputs, to
induce them to trade.
 Sales Brokers are front office staff
whose primary function is to 6
Front Office (Cont…)
 They work in the Sales & Trading
department of the firm.
 Floor Brokers are employees who
arrange trades on the exchange
and on the trading floor of the firm,
if the firm itself were to operate a
trading platform.
 This division of a brokerage firm is
called Floor Operations.
7
Front Office (Cont…)
 Large brokerage firms have a
Corporate Finance department
whose staff are engaged in
distributing large stock and bond
offerings made by companies.
 These personnel work closely with
Sales Brokers.
8
Research
 Many firms employ Financial
Analysts to generate information
reports.
 Each analyst will in general
specialize in an industry or
commodity.
 The responsibilities of such
analysts include forecasting future
prices and earnings.
 These analysts work in the 9
Research (Cont…)
 Research analysts also have the task of
enabling customers to understand the
intricacies of financial instruments and
trading techniques.
 Their reports are the tools with which
Sales Brokers solicit business.
 These analysts also work closely with
Corporate Finance Departments by
giving inputs on M&A activities.
10
Customer Service
 Customer service agents help the
clients to manage their accounts.
 Their activities include facilitating
the establishment of new
accounts; and the transfer and
closure of existing accounts.
 They advise clients with respect to
deposits into and withdrawals from
their accounts. 11
Customer Service (Cont…)
 Customers can get help from these
agents if required, to interpret the
periodical accounts statements
provided by the brokerage firm.
 All these activities come within the
ambit of the Customer Service
Department.
12
The Back Office
 Brokerage firms use computerized
accounting systems to keep track
of their accounts, and to clear and
settle trades.
 Most small firms and some large
firms buy such systems off the
shelf.
 Some of the larger brokerage
houses however use proprietary 13
Back Office (Cont…)
 In some cases it is because these
firms have special needs which
ready made systems cannot
satisfy.
 In other cases it is simply because
an in house system had been
developed, before the advent of
sophisticated off the shelf systems.
14
Street Name Securities
 Traders often choose to allow
brokers or depositories to hold
securities on their behalf.
 Such securities are said to be held
in Street Name.
 In these cases, where a broker
holds the security on behalf of the
client, the broker is the legal
owner.
15
Street Name (Cont…)
 The client only has a
corresponding relationship in his
account.
 When a security is held in Street
Name, the broker has certain
responsibilities thrust on him.
 Firstly he must collect interest or
dividends payments from the
issuing firms, and credit them to
the proper client accounts. 16
 He must keep track off and handle
corporate re-organizations such as
name changes, splits/reverse
splits, bonus issues, mergers,
acquisitions, and liquidations.
 He must also ensure that the
issuers of securities can at all
times communicate with the
beneficial owners of the securities,17
 Such activities are overseen by the
Corporate Reorganizations
Department of the brokerage firm.
18
Market Data & Order
Routing
 Brokerage houses invest heavily in
voice and data systems that
enable their employees to
communicate with clients, dealers,
markets, and with each other.
 These systems are mainly provided
by third party vendors.
19
Market Data … (Cont…)
 When data systems written by
different vendors are used to
exchange information, there can
be serious co-ordination problems.
 And co-ordination is absolutely
vital.
 This is because the clearing and
settlement system needs to report
trades to the accounting system,
which needs to relay position 20
 The software industry has
developed certain communications
protocols that enable systems
developed by different vendors to
interact with each other.
 The most important of these are:
 Financial Information eXchange
(FIX) protocol
 and
21
 Open Financial Exchange (OFE)
protocol
 FIX primarily serves institutional
traders while OFE is essentially for
internet based retail traders.
 The protocols allow traders to
route orders and transmit related
information in standard formats
that can be interpreted by any FIX
or OFE based system. 22
Credit Management
 Brokers often extend credit to
clients, to other brokers, and to
dealers.
 Credit extension may arise on
various scores.
 A client may have insufficient
funds to buy securities and may
consequently seek to borrow a part
of the required amount.
 This is called Margin Trading. 23
Credit Management
(Cont…)
 Or he may seek to sell a security
that he does not own, in which
case he will need to borrow a
security.
 This is called Short Selling.
 The broker must carefully evaluate
all credit relationships to avoid
potential losses.
 This task is undertaken by the
Credit Manager of the firm. 24
Proprietary Operations
 These activities are undertaken by
the brokerage firm for its own
account, or what is known as the
house account.
 We will consider various activities
under this category.
25
Cash Management & Stock
Lending and Borrowing
 Brokerage firms which hold cash
and securities on behalf of their
clients will not permit these assets
to remain idle.
 That is they will seek to keep these
assets productively invested.
 The cash management activities
will be undertaken by the Cashier’s
Department. 26
Cash Management
(Cont…)
 Stock lending and borrowing
comes into the picture where short
sales are involved.
 A broker may lend a share or
arrange for a share to be lent to a
client or another broker for
undertaking a short sale.
 Or else he may borrow a share
from a client or another broker to
enable his client to short sell. 27
Cash Management
(Cont…)
 Employees who handle such
activities are a part of the Margin
Department or the Stock Loan
Department.
28
Risk Management
 The Risk Manager is required to
monitor all activities of the firm to
ensure that risks do not become
unmanageable.
 The specific roles are:
 To ensure that management is
aware of all financial and legal
risks
29
Risk Management (Cont…)
 To ensure that adequate controls
are in place to prevent rogue
traders from creating unauthorized
positions
 To ensure that the concerned
employees understand the
financial ramifications of all
proprietary trades.
 To ensure that proper credit
appraisal of potential clients is 30
Opening an Account
 Opening an account with a broker
requires that the client provide
relevant and sufficient information
to enable the broker to `know its
customer’.
 The rules pertaining to establishing
a broker-client relationship are
governed by NYSE Rule 405 and
NASD Conduct Rule 2310. 31
Account Opening (Cont…)
 These rules state that a customer
should only receive advice and
recommendations which are
consistent with his stated
investment objectives.
 Brokers are required as per these
rules to obtain `essential facts’
relative to each customer account
and each order that is placed in 32
 The minimum information
necessary to open an account with
an NYSE member firm includes:
 Full Name
 Address – Residential and Business
(if any)
 Telephone Number
 Social Security or TIN (taxpayer
identification number)
33
 Employment Details
 Marital Status
 An acknowledgement that the
client is of legal age
34
 An investor need not be employed
to open an account.
 However, if the client is an
employee of a bank or another
securities firm, then special
considerations will apply.
 A bank employee who seeks to
open a margin account must
present the written permission of
his employer. 35
 An employee of another
broker/dealer must present his
employee’s written permission to
open any kind of account.
 Such a client must also give his
consent to the broker to forward
duplicate confirmations of all
transactions and statements of
account to his employer. 36
Investment Objectives
 Every client must provide a
statement of purpose listing the
goal of the account.
 What could be the possible goals?
 These include:
 Preservation of capital
 Earning of income
 Earning of tax-free income
37
Investment Objectives
(Cont…)
 Capital gains
 Speculation
 Hedging
 The broker and the client should
reach an agreement on how the
goals ought to be indicated, to
avoid potential legal disputes.
38
Other Information
 Such information varies from firm to
firm, but is generally consistent across
brokers.
 It includes:
 bank references
 brokerage account references
 income details
 net worth details
 number of dependents
39
Types of Accounts
 Almost all customer related
securities transactions take place
in either a cash account or in a
margin account.
 In addition brokers/dealers
transact significant business with
each other through house
accounts.
 Investment advisors, mutual funds,
and other institutions use omnibus40
Types of Accounts (Cont…)
 What is an Omnibus Account?
 It allows institutions to make large
single transactions which can then
be allocated to various sub-
accounts.
 Futures contracts are executed
through special accounts that are
set up for this purpose.
41
Cash Accounts
 A trader can buy or sell any
security on a cash and carry basis.
 That is, if the purchase is paid for
in full, or if adequate funds exist in
the account, then a cash account
transaction can be put through.
 The securities traded may be
stocks, bonds, mutual funds,
warrants, or options. 42
Cash Accounts (Cont…)
 Customers will receive a written
confirmation from their broker that
payments are due within 3
business days, in the case of T+3
settlement.
 If the client fails to pay, the broker
will liquidate the position, and
impose a 90 day block or freeze on
the account. 43
Margin Accounts
 Margin accounts are used to gain
leverage through the use of
borrowed funds, and for executing
short sales.
 Margin customers have to sign a
margin agreement also called a
customer’s agreement or a
hypothecation agreement.
44
Margin Accounts (Cont…)
 The margin agreement pledges the
customer’s securities as collateral
for the margin loans extended by
the broker.
 The agreement may also contain a
stock-loan consent form which allows
the broker to lend the margined
securities of his clients to other clients
for short sales, and arbitrage
transactions. 45
Margin Accounts (Cont…)
 Margin customers have to be
provided with a copy of the Federal
Truth-in-lending agreement, which
describes how interest will be
computed by the broker.
46
Truth-in-lending Act
 This Act more correctly known as
the Consumer Credit Protection Act
was passed by the U.S. Congress in
1968.
 It is firstly about truthful disclosure
of the terms of a loan.
 But beyond that, it defines and
prohibits extortionate credit
practices. 47
TIL Act (Cont…)
 The Act requires lenders to
disclose the annual percentage
rate of interest (APR) that is being
charged on the loan.
 Lenders must disclose the total
dollar cost associated with
granting a loan – known as the
Finance Charge – which is the sum
of all the charges that are required48
TIL Act (Cont…)
 These additional charges may
include credit investigation fees,
insurance premia etc.
 Since every lender has to quote his
APR based on the same method of
computation, it makes it easier for
the consumer to shop around.
 Why do we need this Act?
 Consider an illustration.
49
Illustration
 Consider a loan where $ 1,200 is lent for
a year at a stated rate of 10%.
 The borrower is required to repay the
principal plus $ 120 after one year as
interest.
 The effective rate of interest is
120
------ = .10 = 10% which is the stated
rate
1200 of interest. 50
Illustration (Cont…)
 Now consider what is called a
Discounted Loan.
 The lender lends a principal
amount of $ 1200. However he
calculates the interest for one year
at a rate of 10%, which is $ 120,
and deducts it upfront.
 Thus the borrower receives $
1,080 at the outset, and must pay
back $1,200. 51
 In this case although the stated
rate of interest is 10% the effective
rate of interest is:
120
------ = 11.11%
1080
 The borrower is clearly paying a
higher rate.
52
 Prior to the enactment of the TIL
Act, lenders in both the cases
could state that they were
charging a rate of interest of 10%
per annum.
 And many gullible borrowers would
get deceived by the second lender.
 The TIL Act prevents this kind of
misleading information.
53
 Now in both of these cases, the
lenders must quote the APR which
is 10% for the first loan and
11.11% in the case of the second
loan.
 Thus unless an investor is forced to
accept a loan with inferior terms,
like for instance due to a bad
credit record, he will not go for the54
Street Name Stocks
 Securities in a margin account are
held in street name.
 This is done so as to facilitate the
transfer and pledging of such
securities.
 This is because the broker has a
lien on such securities as long as
there is a debit balance in the
account. 55
 Consequently, if a client fails to
respond to a payment request, the
broker can liquidate or transfer the
shares without obtaining his
signature.
 Thus when securities are held in
street name, the customer’s name
will not be on the share certificate
and nor will it be known to the 56
 In such cases, therefore the
brokerage firm is the registered
owner or owner of record.
 The customer is considered to be
the beneficial owner.
 This is because all dividend and
interest payments, and other
reports issued by the issuer will be
received and forwarded to the
client by the broker. 57
 Holding of securities in street
name offers certain advantages to
clients.
 Firstly it simplifies the transfer
process.
 Secondly it reduces the risk of the
securities being lost or stolen, for
the broker performs the
safekeeping functions. 58
 When the client wants to sell all it
requires a mere phone call.
 Neither signatures, or signature
verifications, are required.
59
Advisory Accounts
 Some customers lack the
knowledge, time, or inclination to
manage their investments.
 They therefore seek the services of
a professional money manager,
investment advisor, or counselor.
 Such facilities can be availed of
from a number of sources.
60
Advisory Accounts
(Cont…)
 These include:
 Bank Trust Departments
 Large National Advisory Firms
 Smaller Specialized Advisory Firms
 Investment Counseling
Subsidiaries of Major Securities
Firms
61
Advisory Accounts
(Cont…)
 Having chosen an advisor, the
client will sign a limited power of
attorney or trading authorization in
his favour.
 The advisor can then trade without
consulting the client.
 The customer is liable for all
transactions costs and advisor
fees. 62
Advisory Accounts
(Cont…)
 Large advisors give a lot of
business to brokers and
consequently can command lower
commissions.
63
Discretionary Accounts
 This is an alternative approach to
fund management.
 The customer in such cases will
sign a trading authorization in
favour of a registered
representative of a brokerage firm.
 Some firms have separate
registration account agreements
for this purpose.
64
(Cont…)
 However there is a potential
conflict of interest between the
client and the registered
representative.
 This is because the broker’s
representative gets no
management fee.
 On the contrary his compensation
is based on the volume of trading
activity in the account. 65
(Cont…)
 Since the representative does not
need permission to trade, it is
always possible for a client to level
allegations of excessive trading
subsequently.
 Such charges may or may not be
justified.
 Another criticism is that brokers
use such accounts as dumping
grounds for unsuccessful IPOs. 66
(Cont….)
 Thus there is a lot of potential for
regulatory and legal problems.
 Many brokers either prohibit such
accounts or else restrict them to
carefully screened customers.
 They also ensure that such
accounts are handled by their
senior personnel.
67
Revenues
 The primary source of revenue for most
brokerage firms is commissions.
 Other sources include:
 Payment for orders
 Interest on cash balances
 Margin interest on loans
 Underwriting fees
 M&A consulting fees
 Security lending fees
68
Commissions
 In most countries commissions are
negotiable.
 There are however countries
where government or exchange
regulations specify fixed
commission rates that a broker
must charge.
Until 2003, the minimum
commission in Hong Kong was
0.25% of the trade value. 69
Deregulation
 Commissions were deregulated in
1975 in the U.S, in 1987 in the
U.K., and in 1999 in Japan.
 In a deregulated industry,
commissions can vary substantially
from broker to broker.
 The quantum of commission will
depend on the extent and quality
of services provided. 70
Commissions (Cont…)
 Deep discount brokers charge the
least.
 However they provide only the
bare minimum by way of service.
 Full service brokers charge the
maximum, but offer value-added
services and advice.
 Discount and deep discount
brokers specify standard 71
 They may even offer additional
discounts to their best clients.
 The commission schedule provided
by a full service broker is usually
just list prices, analogous to the
rack rate quoted by a hotel.
 Very few clients will pay the list
price.
 The regular clients can negotiate
substantially lower rates. 72
 Full service brokers are
increasingly charging a flat fee for
the accounts that they advise.
 This fee covers:
 All trading commissions
 Investment research fees
 Portfolio management fees
 Account maintenance fees
73
 In the absence of a flat fee, the
client would have to pay
separately for each service.
 Clients are happy because this
system, because it takes away the
incentive for the broker to churn
the account.
 Churning refers to inducing trades
primarily to benefit from 74
 The typical flat fee is 1 to 3
percent of the total value of the
account, and is negotiable.
 Fixed fee accounts are also known
as wrap accounts because all
commissions and expenses are
wrapped in a single fee.
75
 The average price is 5-6 cents per
share, but it can range from 1-12
cents per share.
 In most countries, however,
institutional brokers base their
commissions on the size of the
transaction.
 In almost all countries the rates
are negotiable. 76
 The rate may vary depending on:
 The size of the trade
 The difficulty of arranging it
 The soft dollars that it generates
 Institutional clients sometimes get
volume discounts based on the
total volume traded during a
month, quarter, or year.
77
 Most NYSE/NASD member firms
establish a rate schedule and
revise it periodically.
 The smaller brokerage firms
generally wait for changes from
industry leaders like Merrill Lynch
or Salomon Smith Barney before
adjusting their own rates.
 The rates inevitably favour larger
transactions over smaller ones. 78
 The brokerage house will share the
commission with the registered
representative who is handling the
client.
 The principle is the same.
 For a large transaction, the
representative may receive 25-
50% of the gross commissions
earned by the firm. 79
 But for smaller trades the payout
will be less and may even be nil.
 Thus representatives lack an
incentive to handle small investors
who are perceived as unprofitable.
 Institutional investors on the other
hand witness fierce competition for
their business.
80
 There are cases where large
institutions are charged no
commission.
 The loss in such cases can be
justified by the perceived gains
from liquidity and order flow.
 Brokerage houses welcome greater
liquidity because most of them are
dual traders. 81
 However, it is not as if institutions have
been the sole beneficiaries of
deregulation.
 Retail customers too have benefited.
 Prior to deregulation, the fixed
commission structure was subsidizing
retail customers at the expense of
institutional clients.
 Thus when rates were deregulated,
retail clients witnessed a sharp increase
in rates. 82
Discount Brokers
 These firms started out as small
no-frills players.
 But some of them like Charles
Schwab and Fidelity Investment
have grown large enough to be
comparable with the big full
service brokerage houses.
 Such brokers offer the same
services or attractions to all their
clients. 83
Discount Brokers (Cont…)
 In most cases they do not offer
their own research.
 Many simply offer Standard and
Poor’s reports on major
companies.
 Fidelity is an exception.
 In 1997 it established an
agreement with Salomon to offer
its institutional research. 84
 In return Fidelity agreed to provide
Salomon with access to its
customers for marketing new
equity issues.
 In a discount brokerage house, the
registered representative is merely
an order taker.
 He is forbidden by firm policy to
make any kind of investment
recommendation. 85
 The representative’s pay is not
linked to the solicitation of new
business or to active trading.
 And it is much lower than that of a
representative working with a full
service firm.
86
Deep Discount Brokers
 These firms charge even less as
compared to discount brokers.
 But they usually require a
minimum number of trades
annually and/or a large account
balance.
87
Soft Commissions
 In an unregulated market how will
a broker obtain greater order flow.
 He will lower his commissions
 And he will try and offer better
services
 In a price regulated market the
only choices are:
 Offer better service
 Or offer other things of value 88
Soft Commissions (Cont…)
 Before deregulation brokers gave
institutional clients many free
services.
 The services took many forms.
 They provided investment
research
 They gave away accounting
systems; communications
systems; computing systems; and 89
 Clients were given marketing
incentives such as:
 Tickets to major sporting events
 All expense paid trips to
investment conferences in exotic
locations
 In return clients paid high
commissions.
90
 To promote fairness in the
systems, that is, to ensure that the
services provided were
commensurate with the value of
business, they created a system of
soft dollar accounting.
 Under this scheme, a client earned
one soft or notional dollar for a
certain amount of hard dollars 91
 These soft dollars could then be
used to procure services from the
broker.
 They could even be used to
procure services from third parties
via brokers.
 The soft dollar system allowed
brokers to compete for business
despite the fixed commissions. 92
 A more aggressive broker would
simply gift away soft dollars more
easily.
 Clients benefited from the
competition and by way of lower
net trading costs.
 The soft dollar system basically
undermined the concept of fixed
brokerage commissions and 93
 But the abolition of the fixed
commission regime has not lead to
the end of the soft dollar system.
 In fact, the use of soft dollars has
increased after deregulation.
 According to the SEC the total
value of research paid for with soft
dollars exceeded US dollars 1
billion in 1998.
94
 In fact to obtain such soft dollars, many
institutional traders, are willing pay
much higher commissions than they
would otherwise have had to pay for
trade execution.
 In 1998 soft dollar brokers offered 1
dollar of soft dollar services on an
average, for every 1.7 dollars received
by way of hard dollar commissions.
95
 What is it that makes the soft
dollar system popular, despite
deregulation?
 The reason is that mutual funds
find this system to be attractive.
 When an investment fund pays
hard dollars for expenses other
than trading commissions, the cost
appears as an expense in the
books of accounts. 96
 Trading commissions, however, even
though they are paid for with hard
dollars do not show up as direct
expenses in the books of account.
 Instead they have a financial impact on
the net price at which the fund buys or
sells shares.
 Commissions will raise purchase prices,
and lower sales proceeds.
97
 Many investors prefer to invest in
funds with a low expense ratio.
 Thus many funds prefer to pay for
services with soft dollars in order
to create an illusion that costs are
being managed more effectively.
98
Directed Brokerage &
Commission Recapture
 Many institutional investment
sponsors direct their investment
advisors to use the services of
specific brokers.
 The sponsors thus create direct
brokerage relationships to support
specific brokers.
 For instance, political
considerations force many state
and municipal pension funds to use99
Directed Brokerage
(Cont…)
 Pension plans at times negotiate
commission recapture agreements
with brokers to whom they direct
orders.
 These agreements require the
broker to return to the sponsor
some of the commissions that are
paid.
 These recaptured commissions
may reflect volume discounts or 100
Directed Brokerage
(Cont…)
 State and municipal plan sponsors
use this money to pay for
investment consulting services for
which they would otherwise have
no budget.
 According to the Employment
Retirement Income Security Act
(ERISA), trustees of private
pension plans in the U.S have to 101
Directed Brokerage
(Cont…)
 Thus if they were to recapture any
commissions they would have to
return them to the fund.
 Thus private pension plans
generally do not negotiate such
recapture agreements.
102
Payments for Order Flow
 These payments are made by
dealers to brokers for directing
orders to them from their clients.
 For many retail-based security
brokers, such payments can be a
significant source of revenue.
103
Interest Income
 Some times brokers lend a part of
the money that is required by an
investor to buy securities.
 This is called Margin Trading.
 In such cases the broker will
charge interest on the margin loan.
 The rate of interest is based on the
broker call money rate.
104
Interest Income (Cont…)
 This is the rate at which a broker can
borrow from another broker or a bank.
 Brokers also earn interest on the cash
that is deposited with them by their
clients.
 But this is largely offset by the interest
that they are required to pay to their
clients on such balances.
 But in the net the broker will still make
money. 105
Interest Income (Cont…)
 Some brokers will not pay interest
on the client’s cash balance.
 And there are others who will pay
only if the balance were to exceed
a certain minimum figure.
106
Short Interest Rebate
 When a trader wants to short sell a
security his broker must have the
security ready for delivery to the
buyer.
 Thus before a broker accepts an
order to short sell, he will first
determine if the security is
available.
 In practice the broker will usually
have securities that he is holding 107
Short Interest (Cont…)
 If so, he can deliver these securities.
 If not he must borrow the securities
from someone else.
 When the broker delivers a security that
he holds in street name, he will not pass
on the proceeds to the short seller.
 He will keep the cash as collateral in
order to ensure that the short seller is
able to repurchase the security.
108
 Thus the broker can invest the
proceeds from the short sale, and
will earn interest income on the
same.
109
 The interest that a broker earns
directly or indirectly on the
proceeds from a short sale can be
a very significant source of
revenue.
 Large clients and professional
traders demand that their brokers
rebate some of the interest earned
on the proceeds of the short sale. 110
 This kind of an interest payment is
called a short interest rebate.
 Retail brokers however, generally
refuse to pay short interest rebates
to their clients as a matter of firm
policy.
111
Security Lending Fees
 A broker who holds securities in
street name will often lend them
for short sales.
 In return he will get a securities
lending fee.
 The fee would depend on the
demand for short positions and the
availability of the shares.
112
Placing Orders
 Once an investor has opened an
account he may place an order by:
 Telephone
 Mail
 Telex
 Fax
 Personal contact
 Over the Internet
113
Placing Orders (Cont…)
 When the order is received, a
registered representative will fill
out an order form.
 He must take the utmost care
while filling out the form.
 A wrong entry may cause the
computer to reject the order,
which could lead to the investor
missing the market.
114
An Order Form
 Typical information sought on an
order form includes:
 Buy order or Sell order
 If sell, sell long or sell short
 Place of execution – NYSE, AMEX etc.
 Type of account – cash or margin
 Normal settlement or cash settlement
 Solicited or unsolicited order
115
An Order Form (Cont…)
 Disposition of securities
purchased:
 Transfer and ship to customer
 Retain in street name
 Deliver against payment to a bank or
another broker
 Application of sale proceeds
 Retain or
 Payout
116
An Order Form (Cont…)
 The security symbol or description
 Number of shares
 Price indication
 Market
 Limit

Stop

Stop-limit
 Customer’s name and account
number
 Representative’s name and number
117
Following Execution
 Once the order is executed, the
representative should phone the
customer as promptly as possible,
and relay the following:
 Execution price
 Approximate amount – including fees
and commissions
 Settlement date
118
Following Execution
(Cont…)
 A customer should not wait for the
receipt of the confirmation by mail
before remitting the funds
 The market makes no allowance for
postal delays
 Funds must therefore arrive on time –
confirmation or no confirmation
119
Confirmations
 It is a report sent by the broker to
the customer on how the order
was executed.
 It is called `confirm’ by Wall Street
traders.
 It will have to disclose the
following information.
120
Confirmations (Cont…)
 Trade date
 Settlement date
 Security
 Number of shares
 Or principal amount in the case of
bonds
 Execution price
 Place of execution
121
Confirmations (Cont…)
 Principal or agency transaction
 Commissions or markup
 Accrued Interest in the case of
bonds
 Net amount due inclusive of all
fees
 To the broker in the case of
purchases
 To the customer in the case of sales 122
Statements
 NYSE rules require that a
statement of account should be
sent to a customer in a month if
there is an activity in the account.
 The activity could be:
 A trade
 A dividend credit
 A deposit
123
Statements (Cont…)
 If there is no activity, the client
must get at least a quarterly
statement.
 The statement summarizes all
account activity during the past
period and gives the date for each
entry
124
Cash Balances
 Brokers do not require a minimum
amount of cash to be held as a
credit balance in the account.
 Some retail brokers will not pay
interest on such balances
 There is no legal requirement that
such interest be paid.
125
Cash Balances (Cont…)
 Large brokers and some small
ones offer a combined money
market and brokerage account
 That is, idle credit balances are
automatically swept into MMMF
shares.
 This concept was pioneered by Merrill
Lynch Cash Management Account.
 Holders can write checks against such
balances.
126
Cash Balances (Cont…)
 Such accounts require a minimum
balance to open – ranging from
$5,000 to $25,000.
 These accounts usually permit
margin trading.
127

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