A hands-on options curriculum covering real trading concepts. Read the lessons, work through examples, and test your knowledge.
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Lesson 8: 2.7: Brokers & Financial Intermediaries
Differentiate between introducing brokers, prime brokers, clearinghouses, and custodians who secure transactions.
1. Connecting Buyers and Sellers
Brokers act as agents on behalf of investors, facilitating the execution of buy and sell orders. Unlike market makers, brokers do not trade from their own inventory; they find the opposite side of your transaction and charge a commission or routing fee.
Without brokerage intermediation, individual investors would have no way to access the matching engines of centralized exchanges.
★ Key Difference: A broker connects trades as an agent; a dealer executes trades as a principal using their own cash.
2. Clearing and Settlement Infrastructure
Behind every electronic click is a complex network of intermediaries:
• Clearinghouses: Act as central counterparties, validating, matching, and guaranteeing that the transfer of shares and funds completes without failure.
• Custodians: Specialized financial institutions that physically and electronically hold assets in secure custody, protecting them from broker insolvency.
Click to enlargeKNOWLEDGE RECONNAISSANCE
What is the primary operational difference between a Broker and a Dealer?
What is the main role of a Clearinghouse?
More lessons in this module
- 2.0: Overview of Market Participants
- 2.1: Retail Investors & Traders
- 2.2: Institutional Investors (Mutual/Pension Funds)
- 2.3: Hedge Funds & Proprietary Trading Firms
- 2.4: Investment Banks & Underwriters
- 2.5: Market Makers & Liquidity Providers
- 2.6: Central Banks & Monetary Policy
- 2.8: Regulators & Market Oversight (SEC, CFTC)
- 2.9: Sovereign Wealth Funds
- 2.10: High-Frequency Trading (HFT) & Algorithmic Firms
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