What is an '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.

BREAKING DOWN 'Executing Broker'

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.

What Does an Executing Broker Do With a Stock Order?

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.

RELATED TERMS
  1. Two Dollar Broker

    A two dollar broker is a floor broker who executes orders for ...
  2. Agency Broker

    An agency broker is a broker that acts as an agent to its clients. ...
  3. Execution

    Execution is the completion of a buy or sell order for a security.
  4. Carrying Broker

    Carrying broker refers to a commodities or securities broking ...
  5. Deep Discount Broker

    A deep discount broker mediates sales and exchanges between securities ...
  6. Business Broker

    A business broker is a company that assists in the purchase and ...
Related Articles
  1. Investing

    Picking your first broker

    If you're a rookie investor, choosing a broker may be your first big investment decision. Learn more on whether you should you go with a full-service broker or a discount broker.
  2. Trading

    Is your forex broker a scam?

    While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
  3. Investing

    What is a Discount Broker?

    A discount broker is a stockbroker who carries out "buy" and "sell" orders at a reduced commission compared to a full-service broker, but provides no investment advice.
  4. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  5. Financial Advisor

    Investment Advisor Versus Broker

    What is the difference between an investment advisor and a broker? They're two different jobs with their own financial specialties.
  6. Investing

    How to Choose a Forex Broker: Everything You Need to Know

    Take your time when looking for a forex broker because a bad decision can be costly.
  7. Investing

    Understanding Market Orders And Limit Orders

    A market order executes a transaction as quickly as possible at the present price. Immediacy is the main concern. A limit order is executed at or below a purchase or sale price. Price is the ...
RELATED FAQS
  1. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  2. Why Do Brokers Ask for Personal Information?

    There are 3 reasons a broker needs personal information: suitability, record-keeping and the law. Read Answer >>
  3. How long does it take a broker to confirm a trade after it is placed?

    Learn about placing trades with a broker and the amount of time required to received confirmation of different types of orders. Read Answer >>
Trading Center