What Is a Member Firm?
A member firm is a brokerage or financial firm that has been granted membership on an organized stock exchange, commodities exchange, or other types of securities exchange. Only member firms are given the rights and privileges of trading on the exchanges of which they belong.
In the United States, this term was initially used in relation to the firms that had purchased seats on the New York Stock Exchange (NYSE), although its meaning has changed over time to now include several exchanges around the world.
- Member firms are companies that are members of a stock exchange.
- Many securities exchanges are self-regulatory organizations (SROs), 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
In the past, individual traders would own seats on the NYSE, which would entitle them to make trades from the physical trading floor of the exchange. Today, a broker-dealer or broker becomes a member of an exchange by filling out the appropriate forms and sending a check to the organization. The applicant must meet certain regulatory standards to qualify.
These firms are often responsible for various market making activities intended 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 are relied upon to 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.
Member Firms and the NYSE
The NYSE converted into a publicly-traded company via an IPO in 2007, with the proceeds effectively buying out its member firms. At the time of this change, the NYSE had 1,366 seat-holders, who each received equity and cash compensation as part of the NYSE’s shift to a public entity. Today, NYSE membership still exists, consisting of companies and firms who apply for admission rather than purchasing their seats directly.
The NYSE distinguishes between regular market makers and lead market makers, the latter of which have greater responsibilities and privileges. Today, there are roughly 20 lead market makers (specialist firms) on the NYSE and approximately 150 regular market makers (MMs).
Real World Example of a Member Firm
Perhaps the most famous American member of the NYSE is Goldman Sachs (GS), which operates as a NYSE lead market maker, also known as a specialist. 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. In recent years, it has participated 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 the 2012 IPO of Facebook (FB).
Aside from market making, Goldman Sachs is engaged in a wide variety of financial activities, including investment banking; business and consumer lending; various proprietary trading activities, including high-frequency trading (HFT); private equity investing; and investment management.