3 Types of Broker-Dealers

How to Start an
Introducing Broker-Dealer

A broker-dealer is a company that engages in the business of trading securities for its own account or on behalf of its customers. There are many different types of broker-dealers, allowing them to sell different securities and generate different revenue streams. The three (3) most common types of broker-dealers include introducing brokers, online brokers and clearing brokers.

An investment management broker-dealer (i.e. securities investment business) may also be involved in investment banking by helping to find buyers and sellers of investment securities such as bonds, MTN's and structured notes. They can provide investment advice to their high net worth/sophisticated clients and earn advisory fees, which could be commission or fee based. An investment management broker-dealer may also be involved in private placements, in which they receive flat fees or commissions.

Introducing/Fully Disclosed Broker-Dealer

A broker-dealer that is registered in the Cayman Islands will generally have one or more clearing broker-dealers that they work with that will clear their trades. This type of broker-dealer is known as an introducing broker. An introducing broker-dealer introduces their clients to a clearing broker. The introducing broker complete the onboarding application with the client. The clients' cash and securities are sent from the client to a clearing broker to clear the trade, and the clearing broker will also maintain the customers' accounts. A Cayman Islands Introducing broker-dealer earns commission that are based on trade executions on securities such as stocks, bonds, MTNs, structured notes, options, forex, and commodities. In addition, there are no minimum equity capitalization requirements for an excluded Cayman Islands securities investment business (i.e. broker-dealer)

- Majority of broker-dealers are this type.

- Maintains a formal written agreement with a clearing broker-dealer whereby the introducing broker-dealer does not carry customer accounts (hold customer funds or securities or confirm transactions).

- Significantly less initial start-up and operating costs than general and self-clearing broker-dealers.

- Less administrative and compliance responsibilities.

- Reduced back office expenses.

Online Broker-Dealer

To generate further commissions on securities transactions, an investment management broker-dealer registered in the Cayman Islands may also provide online trading to its high net worth/sophisticated clients. The broker-dealer can offer (through its clearing firms trading platform) an online white-label branded trading work which lets traders, investors and institutions trade stocks, options, futures, forex, bonds and funds on over 100 markets worldwide from a single account.

- Trades are placed with personal computers.

- Execution of trades occurs without any personal contact.

- Highly dependent on technology.

- Low transaction costs.

- Ease of execution.

- Investors perform their own research.

Clearing Broker-Dealer

To hold customer accounts with cash and clear trades, a broker-dealer needs a considerable amount of capital and with strong back-office capabilities. Due to the high regulatory requirements and high capitalization, most broker-dealers do not self-clear their trades or hold customer accounts. A clearing broker-dealer affirms that trades are settled according to the instructions, and the transaction is smooth and successful.

- Enters into agreements with introducing broker-dealer to "carry" or "clear" accounts.

- A substantial number of clearing firms are affiliated with introducing broker-dealers.

- Handles trade executions and transfers.

- As custodian, provides safekeeping (of customer funds/securities).

- Complete control of transaction processing.

Our turn-key solution involves setting up and structuring your Cayman Islands investment management broker-dealer.

Contact us to receive a free summary outlining the process and costs.

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