Introducing Broker vs Executing Broker vs Clearing Brokers: Key Differences, Pros & Cons

Compare introducing brokers, executing brokers, and clearing brokers — how they differ in services, trade execution, settlement, regulations and risks. Learn the pros and cons of each to determine the best brokerage model for your investing needs.

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What is an Introducing Broker?

An introducing broker, also known as an IB, is a firm or individual that provides clients access to brokers and facilitates trading activities but does not actually execute or clear trades.

Key facts about introducing brokers:

1. An introducing broker solicits client business and refers clients to other brokerages that will carry out trades and maintain custody of assets.
2. Introducing brokers provide advisory services to help investors but offload trade execution, clearing, and custodial activities.
3. Common services offered by introducing brokers include client acquisition, account paperwork processing, trade order placement, investment advisory, research, and marketing.
4. Introducing brokers pass client trades off to executing brokers who will place buy/sell orders on exchanges.
5. They also work with clearing brokers who will settle the trades and maintain custody of client securities and cash.
6. Introducing brokers earn a portion of the transaction fees and commissions generated by referred clients. They avoid the costs and regulatory burdens of directly executing and clearing trades.

What is an Executing Broker?

An executing broker is a brokerage firm that directly executes buy and sell orders on behalf of clients.

Key facts about executing brokers:

1. Executing brokers receive trade orders from clients or other brokers and execute the trades on exchanges or trading venues.
2. They act as agents, buying and selling securities on behalf of their clients to fulfill trade orders.
3. Executing brokers typically do not provide custodial services or maintain client accounts. They focus on trade execution.
4. Key responsibilities include obtaining best execution on trades, managing order flow, facilitating exchanges of assets, and documenting executed trades.
5. To place orders directly on markets, executing brokers must maintain exchange memberships and meet capital requirements.
6. Many introducing brokers partner with executing brokers to outsource the trade execution function.

What is a Clearing Broker?

A clearing broker is a firm that settles trades and maintains custody of client assets and cash.

Key facts about clearing brokers:

1. Clearing brokers handle the back-office processing, clearing, and settlement of trades that were executed on behalf of clients.
2. They act as custodians, holding the assets and cash of clients in segregated accounts.
3. Key duties include confirming trades, reconciling accounts, settling transactions by exchanging assets for cash, and maintaining records.
4. Clearing brokers manage collateral requirements and mitigate settlement risks.
5. Many introducing brokers and executing brokers partner with clearing brokers to outsource post-trade processes.
6. Clearing brokers must meet capital requirements and comply with regulations around asset custody and segregation.

Key Differences Between the 3 Types of Brokers

Choosing Between an Introducing Broker, Executing Broker, and Clearing Broker

There are several factors to consider when deciding which type of brokerage model is right for your needs:

• Investment Style — Active traders may prefer direct market access through an executing broker, while passive investors may be better served by an introducing broker providing guidance.
• Service Needs — Assess what services beyond basic trade execution are important like advisory services, custody, reporting, and capital access.
• Costs — Account minimums, trading commissions, and other fees vary between models.
• Control over Trades — Executing brokers offer more control compared to introducing brokers that outsource execution.
• Hybrid Model — It’s possible to use a combination of brokers, such as an introducing broker partnered with an executing and clearing broker.

The optimal brokerage model depends on the services you want, your trading frequency and strategy, costs, and desired control over the trading process. Investors needing custodial services and investment guidance may favor introducing brokers, while active traders pursuing exchange access and execution may prefer executing brokers.

How Brokers Make Money

Understanding how different types of brokers generate revenue provides context on their incentives and potential conflicts:

• Introducing brokers earn a portion of the transaction fees and commissions from trades they refer to executing and clearing brokers. They may also charge account fees or get paid for directing client assets into investment products that provide trail compensation.
• Executing brokers mainly generate revenue from trade execution fees and commissions. They may also earn interest income on client cash balances held intraday/overnight or through payment for order flow arrangements where market makers pay for order flow.
• Clearing brokers primarily earn fees for settlement, custody, and clearing services based on account types and assets under management. Interest income from reinvesting client cash and securities lending are other revenue sources.
• In a hybrid model, fees are split between the introducing, executing, and clearing brokers per their revenue sharing arrangements.

Broker Technology Infrastructure

The technology infrastructure and capabilities differ significantly across brokerage models:

• Introducing brokers focus on front-end client portals and advising systems. They lean on partners for trading platforms, market access, and back-office management.
• Executing brokers specialize in low-latency trading systems, direct market access, execution algorithms, and order management systems. They outsource other technologies.
• Clearing brokers invest heavily in post-trade systems for clearance, settlement, asset servicing, compliance, and reporting. They provide client reporting portals.
• A full-service brokerage combines trading, clearing, compliance, and servicing technologies under one roof. Specialist brokers excel in specific technology domains.

Pros and Cons of Introducing Brokers

Pros of Using an Introducing Broker:

• Provides access to investment research, advisory services, and trade recommendations.
• Simplifies the trading process through a single interface.
• Consolidates reporting instead of separate accounts with multiple brokers.
• Lower account minimums than traditional full-service brokerages.
• Avoid overhead costs and regulations associated with self-clearing.

Cons of Using an Introducing Broker:

• Additional layer of fees charged on top of executing and clearing fees.
• Do not have direct control over trade execution price/timing.
• Introducing broker is still fiduciary for investment products sold.
• Reliant on financial stability of executing and clearing brokers.
• Potential conflicts of interest with revenue sharing from partners.

Pros and Cons of Executing Brokers

Pros of Using an Executing Broker:

• Direct market access for faster and more controlled trade execution.
• Ability to shop around for best price from competing markets and venues.
• Specialized expertise in trade execution efficiency and algorithms.
• Avoid overhead required for custodial and clearing functions.
• Lower commissions per trade compared to full-service brokers.

Cons of Using an Executing Broker:

• Most do not provide advisory services, research, or investment guidance.
• Must maintain exchange memberships and meet capital requirements.
• No integrated solution for custody, clearing, reporting, and financing.
• Requires combining multiple brokers to fulfill all trading needs.
• Inability to handle delivery of physical certificates.

Pros and Cons of Clearing Brokers

Pros of Using a Clearing Broker:

• Asset protection through segregated custody accounts.
• Management of collateral and settlement risks.
• Handling of complex post-trade processing and recordkeeping.
• Access to financing, stock loans, and other capital services.

Cons of Using a Clearing Broker:

• Additional fees charged for custodial services.
• Less control over assets compared to self-clearing.
• Reliant on broker’s financial stability to safeguard assets.
• Lack of transparency into asset handling processes.
• Clearing broker failure can place assets at risk.

Regulations for Different Brokerage Models

Brokers in the world are primarily regulated by CySEC and the FSC Mauritius:

• Introducing brokers have lower capital requirements and regulations than executing/clearing brokers. They must register with CySEC and the FSC unless they meet exemption criteria.
• Executing brokers must register as broker-dealers with CySEC and the FSC. They must meet stringent capital requirements to maintain exchange memberships.
• Clearing brokers must register as broker-dealers and meet capital requirements for custodial functions. They must comply with asset segregation and protection rules.

All brokers must abide by regulations like:

• Suitability rules requiring brokers recommend investments appropriate for a customer’s financial situation and objectives.
• Know Your Customer rules to verify client identity and assess risks.
• Best execution requirements to obtain optimal pricing and order execution speed.

Brokers must disclose any disciplinary history, registrations, and financial conflicts of interest.

Choosing properly licensed and regulated brokers is important for investor protection. Head over to CySEC & FSC to research a broker’s background and regulatory record.

Frequently Asked Questions

Q: What is the difference between an introducing broker and an executing broker?

Introducing brokers originate trades and provide client services, while executing brokers execute the trades in the market. Introducing brokers outsource trade execution.

Q: Do I need a clearing broker if I have an executing broker?

Yes, executing brokers focus on trade execution. To settle trades and maintain custody of assets, you would also need to work with a clearing broker.

Q: What brokerage model has the lowest fees?

Introducing brokers tend to have lower account minimums and trading fees vs full-service brokerages. But they also charge a fee on top of executing and clearing fees.

Q: Is it better to use one broker or multiple brokers?

Using multiple brokers allows choosing specialists for execution and custody. But working with one introducing broker can simplify management through a single relationship.

Q: What are the risks of working with introducing brokers?

Introducing brokers have lower capital requirements. They also rely on executing/clearing brokers, so you’re dependent on multiple firms.

Final Thoughts — Choosing the Right Brokerage Model for You

Deciding between an introducing broker, executing broker, and clearing broker requires understanding your trading needs and priorities:

• Introducing brokers are a good fit for passive investors wanting custodial services, investment guidance, and simplified management. However, they come with additional fees and less control over executions.
• Executing brokers appeal to active traders prioritizing direct market access, execution efficiency, and lower commissions. However, trades must still be cleared and assets custodied separately.
• Clearing brokers provide specialized post-trade services but have higher fees and no direct client services.
• A hybrid model combining specialized brokers allows customization but requires coordination.

The optimal approach depends on trading frequency, strategy, desired services, costs, and control preferences. Conduct due diligence on brokers’ regulatory records, services, and pricing to find the best fit. Evaluate trade-offs between convenience and customization.

Join an Introducing Broker Program

After learning about the introducing broker model, you may be interested in joining an established introducing broker program.

Ultima Markets offers an introducing broker program that provides the support, technology, and partnerships needed to start and grow a successful introducing brokerage.

The Ultima Markets Introducing Broker Program provides:

• Turnkey introducing brokerage operations
• Supporting proprietary technology
• Access to a network of executing and clearing broker partners
• Competitive revenue share compensation
• Ongoing training and marketing support

If you are interested in becoming an introducing broker and leveraging the strengths of an established program, learn more about the Ultima Markets Introducing Broker Program here

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