Introducing Broker-Dealers

Lesson

Introducing broker-dealers are firms that have a direct relationship with clients but do not hold client assets or execute trades. Instead, they work with clearing firms to handle these tasks. Introducing broker-dealers play a crucial role in the securities industry by providing clients with access to various investment products and services.

Practice Question #1

Which of the following tasks is NOT performed by an introducing broker-dealer?

A) Providing investment advice

B) Holding client assets

C) Executing trades

D) Offering access to investment products

Select an option above to see an explanation here.

A) Introducing broker-dealers may provide investment advice to clients. B) Introducing broker-dealers do not hold client assets; this task is performed by clearing firms. C) Introducing broker-dealers do not execute trades; this task is performed by clearing firms. D) Introducing broker-dealers offer clients access to various investment products.

Terms

Introducing broker-dealer:: A firm that has a direct relationship with clients but does not hold client assets or execute trades.
Clearing firm:: A company that handles the execution, clearance, and settlement of transactions for broker-dealers.
Direct relationship:: A relationship between a client and a broker-dealer where the broker-dealer provides services directly to the client.
Indirect relationship:: A relationship between a client and a broker-dealer where the broker-dealer provides services through another firm, such as a clearing firm.

Practice Question #2

What is the primary role of a clearing firm in the securities trading process?

A) Providing investment advice

B) Holding client assets

C) Executing trades

D) Offering access to investment products

Select an option above to see an explanation here.

A) Clearing firms do not typically provide investment advice. B) Holding client assets is one of the tasks performed by clearing firms, but it is not their primary role. C) The primary role of a clearing firm is to execute trades on behalf of broker-dealers. D) Clearing firms do not directly offer access to investment products; broker-dealers do this.

Do Not Confuse With

Full-service broker-dealer:: A firm that provides a wide range of services, including holding client assets, executing trades, and offering investment advice.
Prime broker:: A broker-dealer that provides specialized services to hedge funds and other large institutional clients, such as financing and securities lending.

Practice Question #3

Which type of broker-dealer provides specialized services to hedge funds and other large institutional clients?

A) Introducing broker-dealer

B) Full-service broker-dealer

C) Discount broker-dealer

D) Prime broker

Select an option above to see an explanation here.

A) Introducing broker-dealers primarily serve individual investors and do not specialize in services for hedge funds or institutional clients. B) Full-service broker-dealers provide a wide range of services but do not specialize in services for hedge funds or institutional clients. C) Discount broker-dealers focus on low-cost trading services and do not specialize in services for hedge funds or institutional clients. D) Prime brokers provide specialized services to hedge funds and other large institutional clients, such as financing and securities lending.

Real-World Example

An individual investor opens an account with an introducing broker-dealer to gain access to a wide range of investment products and services. The introducing broker-dealer works with a clearing firm to execute the investor's trades and hold their assets. This arrangement allows the investor to benefit from the expertise and resources of the introducing broker-dealer and the clearing firm.