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 interact with clients.
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 Research
Department.
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 systems.
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,
namely the clients.
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 reports to the former.
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 undertaken.
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 such an account.
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 omnibus accounts.
40
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 required to be paid by the
consumer in order to secure the loan.
48
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
the second option.
54
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 issuer.
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 commission schedules.
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 commissions.
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.
 This lead to the evolution of Discount Broking.
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 provided staff training.
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 spent by way of commissions.
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 hastened deregulation.
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
use in-state brokers.
99
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 may simply be rebates.
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 treat
commissions as assets of the fund.
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 in street name.
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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