Carrying Broker

What Is a Carrying Broker?

A carrying broker is a brokerage firm that provides back-office support for other brokers. Examples of such support include ensuring regulatory compliance, recording and distributing client documents, and monitoring credit risk for margin accounts.

Key Takeaways

  • Carrying brokers provide back-office support for other brokerage firms, freeing their clients to focus on higher-value activities.
  • Due to economies of scale, carrying brokers can offer these services to their clients more cheaply than if brokers were to perform them internally.
  • Competition among carrying brokers is based on factors such as industry reputation, the timeliness and accuracy of financial reporting, and their fee structures.
  • Carrying brokers are commonly associated with and have strong relationships with hedge funds and investment banks.
  • Carrying brokers are heavily regulated by financial trading and securities agencies.

Understanding Carrying Brokers

Brokerage firms often rely on carrying brokers so they can focus on higher-value tasks such as onboarding new customers or providing high-touch support to existing clients. These client brokerage firms are sometimes referred to as introducing brokers (IB).

Carrying brokers employ staff and technology that allows them to undertake back-office work at scale for a network of broker customers. Rather than each broker replicating similar administrative bureaucracies, economies of scale can be gained from simply outsourcing those redundant administrative tasks to a small group of carrying brokers. This frees their broker customers to focus on revenue-generating activities.

To attract this business, carrying brokers must market themselves on the quality of their personnel, systems, and track record. As is true in many businesses, larger and more established carrying brokers have an advantage over smaller and newer ones, which may be viewed as unproven. This dynamic is due in part to the fact that some of the activities delegated to carrying brokers can have serious legal and regulatory implications, such as ensuring that client accounts are not being used for money laundering or other illegal means.

Benefits of a Carrying Broker

Of course, there are other factors that clients consider when selecting a carrying broker, aside from their size and track record. One of the key areas in which carrying brokers must compete is in the breadth and timeliness of the information they can provide to their broker customers. The faster a carrying broker can provide accurate information regarding the transactions, margin status, and collateral level of their account holders, the more useful that carrying broker will be with respect to the client's risk management activities.

Carrying brokers will also compete on the basis of the different markets and product types that their clients are able to access through them. If a brokerage customer wants to start trading on a new exchange or using a rare financial instrument, for instance, the carrying broker should have the ability to accommodate this request.

Similarly, carrying brokers will seek to maintain high customer service standards while also offering competitive fees. Carrying brokers will often provide clients with dedicated account managers who can resolve all issues as they arise. When dealing with especially large or valuable clients, carrying brokers will often negotiate special fees, such as waiving certain margin or transaction costs as long as specified levels of volume or assets under management (AUM) are maintained.

What Is a Non-Carrying Broker-Dealer?

A non-carrying broker-dealer is a broker-dealer that does not have any custody of its customer assets to file a new exemption report that will be reviewed by its independent public accountant. In contrast, a carrying broker-dealer does have custody and therefore needs to file a compliance report that is examined by an independent public accountant.

What Is the Difference Between a Broker and a Clearing House?

Clearing houses are the ones responsible for facilitating the actual transaction with the exchanges. This is different from brokers, who ensure that the transaction, or trade, is acceptable to them and the company they represent. They then send that trade to a clearing house, who places the trade with the corresponding exchange.

What Does a Clearing Broker Do?

A clearing broker works for an exchange and facilitates trading between investors and clearing corporations. They ensure that the trade is placed correctly and that the funds are transferred in the appropriate way. Because they take custody of securities and exchange them for fiat currency, they are also responsible for submitting the paperwork associated with each transaction.

What Is a Carrying Agreement?

According to the Financial Industry Regulatory Authority (FINRA), a carrying agreement is an agreement between two firms that are responsible for securities transactions. In 2018, FINRA determined that the wording surrounding carrying agreements was not sufficient, and so they revamped the FINRA manual to better clarify carrying agreements. FINRA Rule 4311 governs the extensive changes (such as prohibiting members from entering into securities transaction agreements with entities that are not FINRA members).

The Bottom Line

Carrying brokers are responsible for performing the detailed transactions sent to them by brokers representing firms, either institutional or retail. The carrying broker performs the necessary transaction, as well as filling the proper paperwork, on behalf of the client who they charge a service fee to for handling the transactions.

Article Sources
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  1. PCAOB. "Standards for Small Firm Broker-Dealer Auditors."

  2. FINRA. "SEC Approves Consolidated Financial Responsibility and Related Operational Rules."

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