Executing Broker

An executing broker is a broker or dealer that processes a buy or sell order on behalf of a client. For retail customers, the order sent to an executing broker is first assessed for appropriateness (automated through parameters for a particular client), and if the order is accepted, the executing broker will then immediately carry out the order. If the order is rejected, the customer is notified and the security is not traded. For hedge funds or institutional clients that have already been qualified, an attempt to fill an order is immediately processed.

Retail investors typically trade online or through a financial advisor who would send their orders to a broker. Because accounts are set up in a way to protect investors, orders are first screened for suitability. For instance, if a client's goal is capital preservation, an order to buy a speculative biotechnology stock on margin would most likely be rejected. When an order is accepted it is processed by the executing broker who has the duty of "best execution."

Executing brokers are often associated with hedge funds or institutional clients that need trade execution services for large transactions. These brokers are usually housed under a prime brokerage service, which offers a one-stop shop service for large active traders. The executing broker within the prime brokerage will locate the securities for a purchase transaction or locate a buyer for a sale transaction. This intermediary service is essential because a transaction of size must be done with speed and at low cost for the client. The executing broker earns a commission on the buy-sell spread, and passes along the execution to the settlement and clearing group of the prime brokerage.

Depending on the type of stock, an executing broker has a number of options. If the stock is traded on an exchange (e.g., NYSE), it can send the order directly to that exchange, to another exchange, or to a third market maker. If the stock trades in an over-the-counter market (OTC) such as Nasdaq, the broker could send the order to that market maker. Limit orders can be routed to an electronic communications network (ECN) that is designed to match buy and sell orders at specified prices. Lastly, the broker may try to fill the order from its own inventory by selling a stock that the broker's firm owns or taking in stock on its books that a customer wants to sell.