A brokerage firm is the subject of the article presented below. A client needs a dealer to process his buying or selling a security. A brokerage firm is the dealer. When a securityís trade is done there are many things that happen. Their sequence with all possible interactions constitutes a process. The article uncovers the operational functions of a typical
Operational functions of a brokerag firm cover two types of relationships:
When a client enters an order with the brokerage firmís representative the order becomes part of a flow of data that the brokerage firm must control. That flow of data becomes a formalised view of what happens after the trade is done.
Brokerage firm provides services to the clients through maintaining a marketing and sales function. These functions are assured by various actors:
(1) marketing people, who work in marketing departments, determine which types of securities the public is interested in and try to adjust the offer to the clients. The types of securities may include:
(2) stockbrokers (salespersons), who work in sales branches (board rooms), contact the customers and sell the securities or ideas to their clients.
(3) processing area people fulfil the following tasks:
(4) administrative area people assure the following functions:
Processing of a brokerage firm area is staged through the following functional unities:
Order room is the point from which all orders emanate. Orders taken from the clients by stockbrokers situated in the sales locations are passed to the branch or main order room. The order room routes them to the point of execution. If a trade based on the order can be made the order room reports the execution price to the branch. Now the stockbroker may inform the client of the orderís completion. This action completes the order roomís functions. Orders directed to the order roomsí go through the following stages:
These stages assure that the orders are:
(*) Reconcilement in the order room comprises matching execution reports coming from the trading area with the orders. Order room assures that all of customerís original criteria have been met. Based on the reconciliation the stockbroker advises the client on his order. Through this step a change of the order by the client is possible.
Purchase & sale department is responsible for the following tasks:
A CUSIP identifier (or in-house number) is associated with each trade. It enables to handle the trade through all cycles of its processing. Some supplementary codes are attributed to the trades that designate the type of operation, the execution point and all possible details enabling the straight through processing (STP). Thus
Selling and buying involves certain computations. For certain types of debt instruments (bonds, notes, bills, CDs) the accrued interests are calculated. These computations are called
Customersí trades are balanced (reconciled) against the opposing brokerage firmís (street-side) transactions. All trades are processed through electronic data processing (EDP) centres. Certain output computer reports are sent to the clearing centres of listed exchanges or over the counter centres (OTC) for further processing. When both sides agree on the trade with all discrepancies removed we say the settlement and thus the
A customer receives a written notification from the brokerage firm for
Brokerage firms must maintain the clientsí accounts in accordance with the rules of Securities and Exchange Commission (SEC). Clients are rarely aware of these rules and they depend entirely on the brokerage firms who act as their watchdogs. The majority of customer-firm rules are enforced by a department known as margin (or credit) department. They assure that all operations concerning customerís purchasing and selling that involve the accounts are within the framework of the regulations. Customers may purchase through two types of accounts:
Customer pays in full when purchasing in
When using a margin account a client uses a loan obtained from the brokerage firm that covers part of the buy. The securities bought on margin account are used as collateral in the operation. They cover the risk of the loan provision by the brokerage firm. The
The daily margins functions cover many other operations. Certain of them are as listed below:
The responsibilities of the cashiering function include:
A brokerage firm uses clientís securities through
Sometimes a brokerage firm
Registered securities are transferred to the transferred agents (banks that maintain the companyís list of owners).
The corporations get reorganised during their life cycles. The change is reflected through the modification of the corporationís stocks. We call the process a corporate event. The
Central depository keeps track of all securities movements through customersí and vaults accounts. The stock record must be in balance and no breaks (when only one side of an entry is recorded) are allowed. Frequent audits look for any discrepancies between the physical count and the stock record position.
The accounting department records, processes and balances the movement of money within a brokerage firm. Dual-entry bookkeeping assures that each movement breaks into two entries: debit and credit. The final step of the accounting process is the
All accounting in a brokerage firm may be broken into the following phases:
All entries into the daily cash record (
Al least once a month all ledger account balances are copied into a document known as
Trial balanced when completed is adjusted for
Employees of the dividend department figure and credit dividends and interest paid on debt instruments. Dividends are paid to stockholders who are registered owners on the night of the record date. The
The essential duties of the dividend department are:
Proxy area of a brokerage firm assures that all communication from the securityís issuer is sent directly to the client when the security detained by him is registered in the street name. Otherwise, when the securities may is registered either in the clientís name, itís the issuer that sends all communication directly to the client.
Communication managed by the brokerage firm, who acts as a nominee for the issuer, covers:
The task of the new account function is to assure that the clientís account is opened properly and show to the client that his business is being taken care for. With the account open, the client may enter an order. Principal types of accounts managed by the brokerage firm are:
The principal source of the information for this article is David M. Weiss book ďAfter the trade is madeĒ. The inspiration for its writing was my recent interview with a head hunter for a bank consultant position where certain knowledge of brokerage form activities had been expressed. Itís also a personal need for condensed information thatís useful when applying for a post in the banking area and by the same time an occasion to share it with other applicants. For a thorough comprehension read the entire David M. Weiss book.