In exchange for a service fee, a carrying broker handles transactions on behalf of another broker. Time constraints, limited funds for back office operations, or inexperience in a particular market are all reasons to use a carrying broker. Contractual agreements are required in such financial relationships so that both parties are aware of their responsibilities. They must usually register with a specific financial market and may be subject to additional regulatory requirements. These safeguard their respective clients’ interests.
Brokers can be extremely busy, and they may find themselves with more orders than they can handle. They can pass some on to a carrying broker to get them filled quickly, and they can also use the services of an experienced broker to get the best deal for a client if they have an order in a market they aren’t familiar with. By contracting out back office expenses and focusing on client relationships, new brokerage firms can take advantage of a contract with a carrying broker to save money.
The carrying broker can hold and update information as well as maintain stock or cash reserves in addition to executing trades. It also handles clearance, ensuring that financial transactions go off without a hitch. These back office functions may necessitate a large team of skilled and experienced employees, which may not be available at all brokerages, particularly those that are just getting started in the market. Setting up a back office can be prohibitively expensive, but a new firm can afford to hire a carrying broker.
Clients of a brokerage can inquire about any contractual agreements the brokerage may have with a carrying broker to handle some or all of their trades. Specific terms in these agreements address concerns about conflicts of interest; for example, brokers cannot execute trades that benefit them while harming their clients. This includes carrying brokers, who are prohibited from doing things like holding a trade back to benefit another client or themselves.
Carrying brokers are audited as part of regulatory oversight of brokerages, traders, and other stock market participants. They must be able to provide inspection information on their trades and clients. This can include records of contracts and agreements to show their legal ties and demonstrate the firm’s compliance with the law. Brokerages and employees may be fined, and other penalties, such as jail time, may be considered in the event of a violation.