Executing Broker

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Execution is the transaction whereby the seller agrees to sell and the buyer agrees to buy a security in a legally enforceable transaction. Thereafter, all the processes that lead up to settlement is referred to as clearing, such as recording the transaction.

Settlement is the actual exchange of money, or some other value, for the securities. Clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. There are 2 types of clearing: In bilateral clearingthe parties to the transaction undergo the steps legally necessary to settle the transaction. Central clearing uses a third-party β€” usually a clearinghouse β€” to clear trades.

Clearinghouses are generally used by the members who own a stake in the clearinghouse. Trading broker and clearing broker definition are generally broker-dealers.

Only members may directly use the services of the clearinghouse; retail customers and other brokerages gain access by having trading broker and clearing broker definition with member firms. The member firms have financial responsibility to the clearinghouse for the transactions that are cleared. It is the responsibility of the member firms to ensure that the securities are available for transfer and that sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member firms will have to make up for any shortfalls.

If a member firm becomes financially insolvent, only then will the clearinghouse make up for any shortcomings in the transaction. For transferable securities, the clearinghouse aggregates the trades from each of its members and nets out the transactions for the trading day. At the end of the trading day, only net payments and securities are exchanged between the members of the clearinghouse. For options and futures and other types of cleared derivatives, the clearinghouse acts as a counterparty to both the buyer and the seller, so that transactions can be guaranteed, thereby virtually eliminating counterparty risk.

Additionally, the clearinghouse records all transactions by its members, providing useful statistics, as well trading broker and clearing broker definition allowing regulatory oversight of the transactions. Settlement is the actual exchange of money and securities between the parties of a trade on the settlement date after agreeing earlier on the trade.

Most settlement of securities trading nowadays is done electronically. In futuressettlement refers to the mark-to-market of accounts using the final closing price for the day. A futures settlement may result in a margin call if there are insufficient funds to cover the new closing price. Modern day settlement and trading broker and clearing broker definition evolved as a solution to the paper crisis of securities trading as more and more stock and bond certificates were being traded in the 's and 's, and payments were still made with paper checks.

Brokers and dealers either had to use messengers or the mail to send certificates and checks to settle the trades, which posed a huge risk and incurred high transaction costs. At this time, the exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done. The trading broker and clearing broker definition st solution trading broker and clearing broker definition this problem was to hold the certificates at a central depository β€” sometimes referred to as certificate immobilization β€”and record change of ownership with a book-entry accounting system that was eventually done electronically.

In Europe, Euroclear and Clearstream are the major central depositories. The process of eliminating paper certificates entirely is sometimes referred to as dematerialization. A further improvement was multilateral nettingwhich further reduced the number of transactions. Brokers have accounts at central depositories, such as the DTCC, which acts as a counterparty to every trade. So instead of sending trading broker and clearing broker definition and securities for each transaction, trades and payments were simply aggregated over the course of the day for each member broker, then were settled at the end of the day by transferring the net difference in securities and funds from 1 account at the depository to another.

For example, if a broker bought shares of Microsoft for a customer and sold 50 shares of Microsoft for another customer, then the broker's net position is the accumulation of 50 shares of Microsoft, which would be recorded at the end of the market day. Likewise, only 50 shares of Microsoft would be transferred to the broker's account, since this is the net difference of buying shares and selling 50 shares. Nowadays, governments around trading broker and clearing broker definition world are promoting, or even requiring, central clearing, so that they can assess the systemic risk being imposed upon economies by their financial institutions, especially in the trading of derivatives, as was witnessed in the recent credit crisis ofwhen governments had to bail out many financial institutions because of a possible domino effect if a major institution would fail.

Central clearing is the best means of maintaining records so that financial risks to the economy can be better assessed.

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A commodity broker is a firm or individual who executes orders to buy or sell commodity contracts on behalf of clients and charges them a commission. A firm or individual who trades for his own account is called a trader. Commodity contracts include futures , options , and similar financial derivatives. Clients who trade commodity contracts are either hedgers using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit.

Ever since the s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies. When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker.

When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading is conducted in the pits of a commodity exchange via open outcry. A floor broker is different than a "floor trader" he or she also works on the floor of the exchange, makes trades as a principal for his or her own account.

IBs do not actually hold customer funds to margin. They advise commodity pools and offer managed futures accounts. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives. A CTA is generally the commodity equivalent to a financial advisor or mutual fund manager.

A commodity pool is essentially the commodity equivalent to a mutual fund. This is the commodity equivalent to a registered representative. From Wikipedia, the free encyclopedia.

Retrieved from " https: Commodity markets Commodities used as an investment Brokerage firms. Views Read Edit View history. This page was last edited on 9 February , at By using this site, you agree to the Terms of Use and Privacy Policy.