Prime Broker Vs Executing Broker
A prime broker vs executing broker is a large financial institution that provides a range of services to hedge funds, investment managers and institutional clients including trade execution, securities lending, margin financing and risk management. They are also responsible for clearing and settlements. They have deep relationships with many exchanges and market liquidity providers. Hedge funds and other institutions use them to access the best prices for their trade orders.
An executing broker is a broker or dealer that processes buy or sell order from retail customers for execution in the market. They focus on providing low-cost and high-speed trade execution with best-priced liquidity. They typically offer market-leading search, analysis and trading platforms and tools. Many executing brokers specialize in one or more asset types, such as equities, futures and forex. This specialization allows them to develop expert knowledge of those markets and provide tailored services.
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The executing broker reports trade information to the prime broker who then verifies and allocates the trade to individual client accounts. The executing broker and the prime broker then settle with each other on a net basis for all trades that have been executed for each client. This netting process simplifies the settlement process and reduces operational costs for all parties.
Many large discount brokers have established prime brokerage units to cut their fees. However, they cannot compete with bulge-bracket banks who can lend tens of millions of dollars in margin to the same clients that are paying thousands for trade execution.