Stockbroker

A stockbroker is a regulated professional individual, usually associated with

a brokerage firm or broker-dealer, who buys and sells stocks and othersecurities for
both retail and institutional clients, through a stock exchange or over the counter, in
return for a fee or commission. Stockbrokers are known by numerous professional
designations, depending on the license they hold, the type of securities they sell, or
the services they provide. In the United States, a stockbroker must pass both
the Series 7 and Series 63 and or Series 66 exams in order to be licensed. In most
English speaking venues, the two word term stock broker, like stock brokerage,
normally applies to the brokerage firm, rather than to the individual.
Other designations

Professional titles similar to that of stockbroker include investment advisor,

and financial advisor. A "financial advisor" may or may not be a stockbroker, since
some Series 6 licensed individuals (who are prohibited from selling stock) go by that
title. An "investment advisor", registered investment advisor, or investment advisor
representative has training and capabilities similar to that of a stockbroker, but
different licensing and different regulatory oversight. Many individuals hold both
licenses, and might typically manage commission-based accounts as a stockbroker
and fee-based accounts as an RIA investment advisor, or "IAR" investment advisor
representative.
The Financial Industry Regulatory Authority (FINRA) provides an online tool designed
to help understand professional designations.
Requirements

Canada
In Canada, a stockbroker is called a "Registered Representative" or an "Investment
Advisor". To be licensed as a Registered Representative and thus qualified to offer
investment advice and trade all instruments with the exception of derivatives, an
individual employed by an IIROC member firm must have completed the Canadian
Securities Course (CSC), the Conduct & Practices Handbook (CPH), and the 90 day
Investment Advisor Training Program (IATP). Within 30 months of becoming
licensed, the registrant is further required to meet the post-licensing proficiency
requirement by passing the Wealth Management Essentials course (WME). A
Registered Representative is also required to complete 30 hours of professional
development (product knowledge) and 12 hours of compliance training every three
year continuing education cycle as set out by the Investment Industry Regulatory
Organization of Canada (IIROC).
To trade options and/or futures, a Registered Representative must pass the
Derivatives Fundamentals Course (DFC) in addition to the Options Licencing Course
(OLC) and/or the Futures Licensing Course (FLC), or alternatively, the Derivatives
Fundamentals Options Licensing Course (DFOL) for options.
Hong Kong
To become a representative one has to work for a licensed firm and pass 3 exams to
prove one's competency. Passing a fourth exam results in obtaining a 'specialist'
license. All tests can be taken with the HKSI. However, passing all tests doesn't
result in automatically obtaining the license. It still needs to be approved by the
financial regulatory body.
Singapore
In Singapore to become a trading representative, you need to pass 4 exams from
the Institute of Banking and Finance. The 4 exams are Modules 1A, 5, 6 and 6A.
After you pass the exams, you need to apply for the license through MAS and SGX.
United Kingdom
In the UK, brokers are required to pass the XII Chartered Institute for Securities &
Investment Certificate in Securities, this qualification is achieved by passing two
exams: Unit 1: FBI Financial regulations or Unit 10 Principles of Financial Regulation
for MiFID compliant retail trading, and Unit 2: Securities Unit 3: Derivatives or Unit
4: for both Securities and Derivatives. Passing Unit 10 or Unit 52 identifies
individuals as having attained FCA Approved Person Status.
United States
While the term "stockbroker" is still in use, more common terms are "broker",
"financial advisor", "registered rep." or simply "rep." — the latter being abbreviations
of the official Financial Industry Regulatory Authority (FINRA) designation
"Registered Representative," obtained by passing the FINRA General Securities
Representative Exam (also known as the "Series 7 exam") and being employed
("associated with") a registered broker-dealer, also called a brokerage firm or (in the
case of some larger money center broker/dealers) a "wirehouse", typically a FINRA
member firm.[7]Other FINRA licenses or series exams exist. Although individuals
holding some of those licenses, such as the "Series 6", cannot be called stockbrokers
since they are prohibited from selling stock and are not trained or licensed in the full
array of capabilities of a Series 7 stockbroker (see list of securities examinations).
Selling variable products such as a variable annuity contract or variable universal
life insurance policy typically require the broker to also have one or another state
insurance department licenses.
Boutique brokerage
A boutique brokerage is a type of brokerage company, that acts much the same as
a boutique shop, just like a fashion boutique. They often do not charge fees, instead
taking a percentage of any profits generated.
Commonly, boutique brokers operate with family and friends and do not
have advertising campaigns. They generally are in the investment field, but can also
exist in other fields such as information technology.
Boutique brokerage can also refer to a real estate brokerage firm.
Floor broker
A floor broker is an independent member of an exchange who can act as a broker for
other members who become overloaded with orders, as an agent on the floor of the
exchange. The floor broker receives an order via Teletype machine from his firm's
trading department and then proceeds to the appropriate trading post on the
exchange floor. There he joins other brokers and thespecialist in the security being
bought or sold and executes the trade at the best competitive price available. On
completion of the transaction the customer is notified through his registered
representative back at the firm and the trade is printed on the consolidated ticker
tape which is displayed electronically around the country. A floor broker should not
be confused with a floor traderwho trades as a principal for his or her own account,
rather than as a broker. Commission brokers are employees of a member firm.
Prime brokerage
Prime brokerage is the generic name for a bundled package of services offered
by investment banks and securities firms to hedge funds and other professional
investors needing the ability to borrow securities and cash to be able to invest on a
netted basis and achieve an absolute return. The prime broker provides a centralized
securities clearing facility for the hedge fund so the hedge fund's collateral
requirements are netted across all deals handled by the prime broker. These two
features are advantageous to their clients.
The prime broker benefits by earning fees ("spreads") on financing the client's
margined long and short cash and security positions, and by charging, in some
cases, fees for clearing and/or other services. It also earns money
by rehypothecating the margined portfolios of the hedge funds currently serviced and
charging interest on those borrowing securities and other investments.
Services

Each client in the market of a prime broker will have certain technological needs
related to the management of its portfolio. These can be as simple as daily
statements or as complicated as real-time portfolio reporting, and the client must
work closely with the prime broker to ensure that its needs are met. Certain prime
brokers offer more specialized services to certain clients.
For example, a prime broker may also be in the business of leasing office space to
hedge funds, as well as including on-site services as part of the arrangement. Risk
management and consulting services may be among these, especially if the hedge
fund has just started operations.
The following services are typically bundled into the Prime Brokerage package:

 Global custody (including clearing, custody, and asset servicing)

 Securities lending
 Financing (to facilitate leverage of client assets)
 Customized technology (provide hedge fund managers with portfolio reporting
needed to effectively manage money)
 Operational support (prime brokers act as a hedge fund's primary operations
contact with all other broker dealers)

In addition, certain prime brokers provide additional "value-added" services, which

may include some or all of the following:

 Capital Introduction - A process whereby the prime broker attempts to

introduce its hedge fund clients to qualified hedge fund investors who have an
interest in exploring new opportunities to make hedge fund investments.
 Office Space Leasing and Servicing - Certain prime
brokers lease commercial real estate, and then sublease blocks of space to hedge
fund tenants. These prime brokers typically provide a suite of on-site services for
clients who utilize their space.
 Risk Management Advisory Services - The provision of risk analytic
technology, sometimes supplemented by consulting by senior risk professionals.
 Consulting Services - A range of consulting / advisory services, typically
provided to "start-up" hedge funds, and focused on issues associated with
regulatory establishment requirements in the jurisdiction where the hedge fund
manager will be resident, as well as in the jurisdiction(s) where the fund itself
will be domiciled.

History

The basic services offered by a prime broker give a money manager the ability to
trade with multiple brokerage houses while maintaining, in a centralized master
account at their prime broker, all of the hedge fund’s cash and securities.
Additionally, the prime broker offers stock loan services, portfolio reporting,
consolidated cash management and other services. Fundamentally, the advent of the
prime broker freed the money manager from the more time consuming and
expensive aspects of running a fund. These services worked because they also
allowed the money manager to maintain relationships with multiple brokerage
houses for IPO allocations, research, best execution, conference access and other
products.
The concept and term "prime brokerage" is generally attributed to the U.S. broker-
dealer Furman Selz in the late 1970s. However, the first hedge fund operation is
attributed to Alfred Winslow Jones in 1949. In the pre-prime brokerage marketplace,
portfolio management was a significant challenge; money managers had to keep
track of all of their own trades, consolidate their positions and calculate their
performance regardless of which brokerage firms executed those trades or
maintained those positions. The concept was immediately seen to be successful, and
was quickly copied by the dominant bulge bracket brokerage firms such as Morgan
Stanley, Bear Stearns, Merrill Lynch, Credit Suisse, Citigroup, and Goldman Sachs.
At this nascent stage, hedge funds were much smaller than they are today and were
mostly U.S. domestic long-short equities funds. The first non-U.S. prime brokerage
business was created by Merrill Lynch's London office in the late 1980s. Post the
2007 - 09 financial crisis new entrants came to the market, such as HSBC with a
custody-based prime brokerage offering.
1980s to 2000s
Through the 1980s and 1990s, prime brokerage was largely an equities-based
product, although various prime brokers did supplement their core equities
capabilities with basic bond clearing and custody. In addition, prime brokers
supplemented their operational function by providing portfolio reporting; initially by
messenger, then by fax and today over the web. Over the years, prime brokers have
expanded their product and service offerings to include some or all of the full range
of fixed income and derivative products, as well as foreign exchange and futures
products.
As hedge funds proliferated globally through the 1990s and the 2000s, prime
brokerage became an increasingly competitive field and an important contributor to
the overall profitability of the investment banking business. As of 2006, the most
successful investment banks each report over two billion dollars in annual revenue
directly attributed to their prime brokerage operations (source: 2006 annual reports
of Morgan Stanley and Goldman Sachs).
Financial crisis of 2007-09
The financial crisis of 2007-09 brought substantial change to the marketplace for
prime brokerage services, as numerous brokers and banks restructured, and
customers, worried about their credit risk to their prime brokers, sought to diversify
their counterparty exposure away from many of their historic sole or dual prime
broker relationships.
Restructuring transactions in 2008 included the absorption of Bear Stearns into JP
Morgan, the acquisition of the assets of Lehman Brothers in the US by Barclays, the
acquisition of Merrill Lynchby Bank of America, and the acquisition of certain Lehman
Brothers assets in Europe and Asia by Nomura. Counterparty diversification saw the
largest flows of client assets out of Morgan Stanley and Goldman Sachs (the two
firms who had historically had the largest share of the business, and therefore had
the most exposure to the diversification process), and into firms which were
perceived, at the time, to be the most creditworthy. The banks which captured these
flows to the greatest degree were Credit Suisse, JP Morgan, and Deutsche Bank.
During these market changes, HSBC launched a prime brokerage business in 2009
called "HSBC Prime Services", which built its prime brokerage platform out of its
custody business
Counterparty risks

The prime brokerage landscape has dramatically changed since the collapse of
Lehman Brothers in September 2008. Hedge funds who received margin financing
from Lehman Brothers could not withdraw their collateral when Lehman declared
bankruptcy due to a lack of asset protection rules (such as 15c3 in the United
States) in the United Kingdom. This was one of many factors that led to the
massive deleveraging of capital markets during the Financial Crisis of 2008.
Upon Lehman's collapse, investors realized that no prime broker was too big to fail
and spread their counterparty risk across several prime brokerages, especially those
with strong capital reserves. This trend towards multi-prime brokerage is also not
without its problems. From an operational standpoint, it is adding some complexity
and hedge funds have to invest in technologies and extra resources to manage the
different relationships. Also, from the investors' point of view, the multi-prime
brokerage is adding some complexity to the due diligence as it becomes very
complicated to perform proper assets reconciliation between the fund's administrator
and its counterparties.[1]
Fees

Prime brokers do not charge a fee for the bundled package of services they provide
to hedge funds. Rather, revenues are typically derived from three sources: spreads
on financing (including stock loan), trading commissions and fees for the settlement
of transactions done away from the prime broker. The financing and lending spreads,
which are charged in basis points on the value of client loans (debit balances), client
deposits (credit balances), client short sales (short balances), and synthetic financing
products such as swaps and CFDs (Contract for difference), make up the vast
majority of prime brokerage revenue.
Therefore, clients who undertake substantial short selling or leverage represent more
lucrative opportunity than clients who do less short selling and/or utilize minimal
leverage.
 Clients whose market activities are principally fixed income-oriented will generally
produce less prime brokerage revenue, but may still present significant economic
opportunity in the repo, foreign exchange (fx), futures, and flow business areas of
the investment bank.
Risks

Prime Brokers facilitate hedge fund leverage, primarily through loans secured by the
long positions of their clients. In this regard, the Prime Broker is exposed to the risk
of loss in the event that the value of collateral held as security declines below the
loan value, and the client is unable to repay the deficit. Other forms of risk inherent
in Prime Brokerage include operational risk and reputational risk.
Large prime brokerage firms today typically monitor the risk within client portfolios
through house-designed "risk based" margin methodologies that consider the worst
case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic,
investing strategies, and other risks of the portfolio. These risk scenarios usually
involve a defined set of stress test scenarios, rules allowing risk offsets between the
theoretical profit and losses (P&Ls) of these stress test scenarios for products of a
common underlier, and offsets between groups of theoretical P&Ls based on
correlations.
Liquidity penalties may be established using a rule-of-thumb for days-to-liquidate
that 10% of the daily trading volume can be liquidated without overdue influence on
the price. Therefore, a position 1x the daily trading volume would be assumed to
take 10 business days to liquidate.
Stress testing entails running a series of what-if scenarios that identify the
theoretical profits or losses for each position due to adverse market events.
Examples of stress test scenarios include:

 Flight to Quality
 3%-15% up or down price movements used in Portfolio margin