What Is Give Up?
Give up is a procedure in securities or commodities trading where an executing broker places a trade on behalf of another broker. A give up trade is usually done because a broker cannot place a trade for a client based on other workplace obligations or because the original broker is working on behalf of an interdealer broker or prime broker who has taken the order directly from his client and passed it on to the executing broker. The process is referred to as a "give up" because the one who executes the trade gives up the associated credit for the purchase or sale on the record books.
Transactions in a give up agreement are closed between the broker who executes the trade and the order initiator.
Understanding Give Up Trades
Give up is not generally a common trading practice used in the financial markets. Give up was more common before the evolution of electronic trading, primarily in the era of floor trading, when certain floor brokers would receive orders from outside. Overall, the act of performing a trade in the name of another broker is generally part of a pre-arranged agreement. Pre-arranged agreements typically include provisions for the give up trade procedures as well as compensation. Pre-arranged agreements can be important since give up trades are not generally a standard practice, and their compensation also falls within an area that is not clearly defined.
Parties Involved in the Trade
There are three main parties involved with a give up trade. These parties include the executing broker (Party A), the client’s broker (Party B) and the broker taking the opposite side of the trade (Party C). While a standard trade often involves two parties—the buying broker and the selling broker—a give up involves one other person who executes the trade (Party A).
In cases where both the original buying and selling brokers are otherwise obligated, it is possible for a fourth party to become involved in a give up trade. If the buying broker and the selling broker both ask separate traders to act on their behalf, then this scenario would result in a give up on the selling side and the buying side.
To ensure the trade is executed in a timely fashion, a request is made of Party A to place the trade on behalf of Party B. On the record books, or trade log, a give up trade shows the information for the client's broker (Party B). Party A executes the transaction on the behalf of Party B and is not formally noted in the trade record.
Compensation agreements are typically created to manage the provisions of the give up trades. The executing broker (Party A) may or may not receive the standard trade spread. Executing brokers are often paid by the nonfloor brokerage firms either on retainer or with a per-trade commission. This comprehensive payment to the executing broker may or may not be worked into the commission that Broker B charges his client.
- In a give up agreement, an executing broker places a commodity or security trade on behalf of another broker.
- On the trade logs, the executing trader gives up the trade to the client’s broker whose information is recorded.
- Give up was common before electronic trading, but is not generally practiced in the financial markets.
- Compensation for the give up trades is not clearly defined by industry standards and usually involves pre-arranged agreements between brokers.
Real World Example
Broker B gets a buy order from a client to buy 100 shares of XYZ on the New York Stock Exchange (NYSE). Broker B works upstairs at a large brokerage firm and needs to get the order down to the floor of the NYSE. To place the trade in a timely fashion, Broker B asks Floor Broker A, who is housed directly on the NYSE, to place the order in his place. Broker A then buys the stock on behalf of the client of Broker B.
Although Floor Broker A places the trade, he must give up the transaction and record it as if Broker B placed the trade. Thus, the transaction is recorded as if Broker B made the trade, even though Floor Broker A executed the trade.