What Is a Member Firm?

The term member firm refers to a brokerage or financial firm with membership to at least one organized stock exchange, commodities exchange, or another type of securities exchange. Member firms are given the rights and privileges to trade on the exchanges to which they belong. Membership is normally granted to a firm's professionals individually rather than to the brokerage itself.

Key Takeaways

  • Member firms are companies that are members of a stock exchange.
  • Membership allows a firm's professionals to execute trades on the trading floor of the exchange.
  • Many securities exchanges are self-regulatory organizations that are made up of their member firms who purchase seats on the exchange.
  • Today’s member firms are large financial institutions that act as market makers on behalf of their clients or who trade for their own portfolios.

How Member Firms Work

The term member firm was initially used to describe firms that purchased seats on the New York Stock Exchange (NYSE). Individual traders would own these seats, which would entitle them to execute trades from the physical trading floor of the exchange.

This meaning has changed over time. It now includes several exchanges around the world. In fact, broker-dealers or brokers become members of a specific exchange by filling out forms and paying a fee to the organization. Applicants must meet certain regulatory standards in order to qualify.

Member firms are often responsible for various market-making activities that are meant to provide liquidity and orderly price discovery for all traders. For example, a member firm would be permitted to carry out client orders or proprietary trading activities in order to generate a profit, but it would also be required to maintain an inventory of securities for the benefit of third-party market participants as well.

In other instances, member firms provide other necessary services, such as recommending opening prices for thinly-traded securities or helping to reduce volatility during special situations such as an initial public offering (IPO) or corporate action.

Special Considerations

Member firms are regulated by the Financial Industry Regulatory Authority (FINRA). The organization operates independently outside of the government, writing and enforcing rules for broker-dealers, capital acquisition brokers, and funding portals registered in the United States.

According to Rule 2T, a member organization, member, or member firm is a company registered with FINRA. This firm designates an individual to execute transactions for the company and is approved by the NYSE.

The NYSE distinguishes between regular market-makers and designated market-makers, the latter of which have greater responsibilities and privileges. Today, there are roughly 20 designated market-makers on the NYSE and approximately 150 regular market-makers.

Real-World Example of a Member Firm

Perhaps the most famous American member of the NYSE is Goldman Sachs (GS), which operates as a lead market maker, also known as a specialist or a designated market-maker (DMM). Founded in 1869, the company is one of the earliest members of the NYSE, having joined in 1896.

The firm has been a major force in the American IPO market for over 100 years, having completed its first IPO in 1906. The company took part in several high-profile issuances, including the 2010 post-bankruptcy IPO of General Motors (GM), the 2014 IPO of Chinese e-commerce giant Alibaba (BABA), and Facebook's (FB) highly anticipated 2012 IPO.

Goldman Sachs is also engaged in a wide variety of financial activities other than market-making, including investment banking, business lending, consumer lending, private equity investing, and investment management. The firm also takes part in proprietary trading activities, including high-frequency trading (HFT).