Brokers and dealers in the stock market


7.1. Types of professional activity in the securities market

Brokers and dealers in the stock market

Securities trust management activities



Clearing organizations in the securities market

7.1. Types of professional activity in the securities market

The functioning of the securities market is impossible without professionals serving this market and solving its problems. In addition, stock transactions require the use of complex computer technology to ensure the process of pricing and dissemination of the necessary information, which also requires professionals.

Professional market participants are those categories of its participants for whom the implementation of specific operations in the stock market is the main professional activity (Fig. 1.). These currently, according to the Law “On the Securities Market”, include:




· over-the-counter trade organizers and stock exchanges;


the registrars;

Settlement and clearing organizations.

Along with the specified categories of participants in the securities market, it is also served by bank employees, employees of investment funds, and civil servants.

All countries apply a licensing system for professional participants in the securities market. For this purpose, licensing rules are being developed. For specialists working in this field and performing specific duties, there is also an attestation system, which is a prerequisite for admission to transactions with securities.

Licensing rules in individual countries may vary, but such requirements as compliance with a certain organizational and legal form, the amount of equity capital and the method of its calculation, and the level of qualification of specialists are practically universal. In many countries, there are additional conditions regarding the combination of professional activity in the securities market with other activities.

Supervision over the activities of professional participants in the securities market is carried out by a specialized state body. Along with it, significant work in the field of supervision and control is carried out by professional associations of market participants.

Professional activity in the securities market in the Russian Federation requires a license from the Federal Financial Markets Service of Russia or a body authorized by it. Currently, there are three types of licenses that give the right to engage in professional activities in the securities market:

1) stock exchange (gives the right to organize exchange trading);

2) to maintain registers of registered securities holders (license of a specialized registrar);

3) a professional participant in the securities market.

The license of a professional participant in the securities market has several varieties:

§ to carry out brokerage activities;

§ to carry out dealer activities;

§ to carry out depository activities;

§ to carry out activities on trust management of securities;

§ to carry out clearing activities;

§ to carry out trade organization activities.

Rice. 1. Types of professional activity in the securities market

There are certain minimum equity requirements for professional participants. Among them are:

¨ for ordinary brokerage activities – 420 thousand rubles;

¨ for brokers working with individuals – 1,680 thousand rubles;

¨ for dealer activities – 670 thousand rubles;

¨ for securities management activities – 2,920 thousand rubles;

¨ for depository activities – 6,260 thousand rubles;

¨ for activities to organize trading in the securities market carried out by non-profit organizations (including stock exchanges) – 8,350 thousand rubles;

¨ for activities related to the organization of trading in the securities market carried out by commercial organizations – 16,700 thousand rubles;

¨ for clearing activities – 8,350 thousand rubles.

Brokers and dealers in the stock market

Brokers in the securities market are represented by specialized firms with the status of a legal entity. In foreign countries, they operate in the form of both a private firm and a joint-stock company. In Russia, they usually exist in the form of limited liability partnerships. The authorized capital of such companies is small in order to fall under the legislation on small enterprises and receive tax benefits. However, over time, these firms seek to increase their net worth growth by expanding their client network.

The main task of brokers and dealers, who are intermediaries in transactions with securities, is to provide partnerships between companies that seek to receive capital and investors who are ready to provide it on certain conditions and make a profit.

A broker is a participant in exchange trading who concludes transactions on behalf and at the expense of a client. According to the Law “On the Securities Market”, brokerage is the performance of civil law transactions with securities as an attorney or commission agent acting on the basis of an agency or commission agreement.

Under a commission agreement, the broker makes transactions on his own behalf, but on behalf of and at the expense of the client. In this case, the broker will act as a party to the transaction, and he is responsible for its execution. If an agency agreement is concluded, then the broker makes transactions with securities on behalf of and at the expense of the client. In this case, all rights and obligations under the transaction arise directly from the client.

The main income of the broker is a commission percentage of the profit received from transactions at the expense of the client.

A dealer (dealer) is a participant in exchange trading who makes transactions on his own behalf and at his own expense, while exhibiting bilateral quotes of the traded asset.

According to the Law “On the Securities Market”, dealer activity is the execution of securities purchase and sale transactions on its own behalf and at its own expense by announcing the purchase and / or sale prices of certain securities with the obligation to purchase and / or sell these securities at announced prices. Only a legal entity that is a commercial organization can be a dealer.

The dealer’s income consists of the difference between the selling and buying prices.

In exchange practice, there are special exchange intermediaries, bearing the names of a trader and a market maker.

A trader is a participant in exchange trading who makes transactions on his own behalf and at his own expense. The word “trader” comes from the English “to trade” – to trade. The trader is fully responsible for the transactions made and for the obligations assumed. Also referred to as a trader:

– client of the clearing firm;

– a person who is in the stock room and has the right to conclude transactions without intermediaries on his own behalf and at his own expense.

Generally speaking, any trader is called a trader on the stock exchange – both a speculator and an investor. The trader enters into transactions at his own expense. A participant in exchange trading who enters into transactions at his own expense is called a principal. Therefore, every trader is a principal.

A market-maker is a dealer who, under a special agreement with the stock exchange, maintains and regulates prices for certain securities. The term “ market-maker ” in English literally means “Making a market”. The market maker is obliged to maintain liquidity of trading in a calm, falling and rising market so that investors can easily buy or sell securities at reasonable prices. Market makers are usually large settlement firms that receive certain benefits and privileges from the exchange for their work.

The role of intermediaries is very high, because in terms of their position in the market, the level of qualifications of employees and access to information, they can help investors in choosing the right strategy for operating on the stock market. To do this, intermediaries need to:

¨ clearly understand the goals of your client;

¨ together with the client, determine the risk that the client is ready to take;

¨ know well the profitability of various types of operations with financial instruments and inform the client about it;

¨ correctly combine the needs of the client and the acceptable risk that he is ready to take;

¨ to advise the client on the current market situation and upcoming forecasts.

Intermediaries involved in the sale and purchase of securities may act as brokerage firms or broker-dealer companies. They are classified depending on the clientele (working with small or only with large investors), the services provided (the whole range of services or only some of them), specialization (by type of securities with which they work).

Thus, in the US market, firms performing all types of services are the largest brokerage and dealer companies such as Merrill Lynch (Merrill Lynch Pierce Fenner & Smith,), Hatton (EF Hutton & Company Inc.,), Dean Weather Reynolds (Dean Witter Reynolds), Prudential Buck (Prudencial-Bach Capital Funding), Smith Barney (‘Smith Barney, Harris Upman & Co.), Pine Webber (PaineWebber Incorporated), Shearson Lehman (Shearson Lehman Brothers) and some others. These firms have hundreds of branches in different countries of the world, where thousands of specialists work.

Employees of broker-dealer firms are also professional participants in the securities market, and they are required to register and obtain a license. In order to provide services to clients, they must pass an appropriate exam. In case of successful delivery, the employee is called a registered representative (registered representative) and can work with all types of securities.

In the securities market, brokers and dealers may perform some other activities that also require a license, such as the functions of a depository and securities manager. Combination with other functions is not allowed.

Leading brokerage firms have a huge impact on the state of exchange trading. While serving as an information and advisory function for their clients, they also influence their behavior, and very often adapt the activities of clients to the needs of their company.

Consider how clients decide on the choice of a brokerage firm. Of course, such a decision is individual each time, but at the same time, some general points can be noted. For example, a large company with a high volume of transactions will most likely choose two or three brokerage firms that have experience in handling large orders. A smaller company may prefer to work with a mid-sized brokerage firm, which, although it will have higher commissions, will have more time to analyze the market and work with each client.

The specialization of brokers in certain types of securities is also taken into account. Thus, in the stock trade of many countries there are brokerage companies that operate mainly in the bond market, including those specializing in a particular type of bonds.

Choosing not one, but several brokers, the firm can place its orders for transactions through one of them, and use the other for obtaining information about the market and consultations. In addition, many firms prefer to have multiple brokers so that none of them has a complete view of the client’s transactions.

Sometimes firms take into account such a factor as the payment system that the brokerage firm applies to its employees. In principle, two options are used in this area: an employee can receive a base salary plus a bonus depending on the profits he makes, or a certain percentage of all commissions he receives.

Using the services of a brokerage firm, clients have the following advantages:

§ significantly increase the volume of trading operations without increasing their own costs for these purposes;

§ have the opportunity to use the services of highly qualified sales personnel;

§ can control their transaction costs, since the costs of intermediary services are directly related to the volume of the client’s transactions.

In addition to operations for the purchase and sale of securities in the secondary market, large brokerage companies are also engaged in the placement of securities in the primary market, the creation and management of investment funds. Many of them provide their clients with intermediary services in the field of bank loans, transaction insurance, etc.

The relationship between the client and the broker is formalized by a written agreement, which specifies all types of instructions that the client will give to the broker. The contract separately defines the procedure for the client to provide payment guarantees and the form of payment. As a guarantee for future transactions, the client may provide funds in the form of cash or bills of exchange, a current account opened for a broker, or, if national law permits, an insurance policy. The agreement may also stipulate the possibility of a broker providing a loan to its client. In this case, the operation is carried out at the expense of the brokerage firm, which assumes all financial risk. For such operations, the broker’s income includes not only commissions and interest for a loan, but also a risk fee. In addition, each agreement specifies all types of orders that the broker will accept from its client, the procedure for their execution and features.

Features of the Russian market. Under Russian law, both brokerage and dealer activities are subject to mandatory licensing.

In accordance with the current legislation, the functions of a broker in Russia can only be performed by legal entities that are a commercial organization established in the form of a joint-stock company or a limited liability company. Licenses for brokerage activities are issued by the Federal Financial Markets Service, and credit institutions can obtain a license from the Central Bank of the Russian Federation.

Currently, brokerage licenses can be of the following types:

¨ to carry out brokerage activities in transactions with securities, with funds of legal entities;

¨ to carry out brokerage activities in transactions with securities, with funds of individuals;

¨ to carry out brokerage activities in transactions with government securities, securities of the Russian Federation and municipalities.

To obtain a license to work with individuals, two years of experience in brokerage services for legal entities is required.

The following types of licenses can be obtained to carry out dealer activities:

¨ to carry out dealer activities in operations with securities;

¨ to carry out dealer activities in operations with government securities, securities of constituent entities of the Russian Federation and municipalities.

Russian legislation contains a number of requirements for persons engaged in brokerage and dealer activities. These requirements relate to their financial and economic condition, as well as the level of qualifications of managers and specialists of these organizations.

The main financial requirement relates to the amount of equity capital of a professional participant in the securities market, for which a minimum level is established. It is different for brokerage and dealer companies, and also varies depending on the type of clients served. The requirements for the size of the company’s own capital relate not only to the moment of its registration as a professional market participant, but also to the entire period of its performance of these functions.

Requirements for the professional qualifications of companies engaged in brokerage or dealer activities relate to the fact that the organization must have an employee who monitors the compliance of brokerage and dealer activities with legal requirements. Such controllers must have a higher legal education and meet the qualification requirements of the Federal Financial Markets Service.

Participants’ behavior is monitored through the mechanism of quarterly reporting by professional market participants to the FFMS. These reports must contain information on the results of the company’s economic activities, the number of transactions concluded and other information in the prescribed form.

In necessary cases, the FFMS may use such a measure as suspension of the license of a professional participant in the securities market or its cancellation. The license will be suspended if the FFMS reveals violations committed by the broker or dealer, in particular, non-compliance with the current securities legislation, financial and economic violations, violations of a procedural, as well as functional nature. When the license of an organization is suspended, a certain period is provided for their elimination.

In case of repeated violations of the rules for working on the securities market, the license of a professional market participant may be canceled.

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