How to Select a Prime Brokerage and Their Role

As a large financial institution or high volume individual trader, you may need to select a prime brokerage firm. Some financial markets are very actively traded and the transactions tend to be large. In such cases, a specialized brokerage service, called a prime brokerage, may be required to facilitate transactions between large investors and large financial brokers.

A Prime brokerage may be described as an organization that facilitates financial transactions for special clients such as the lending of securities, cash management services, leveraged trading services, and other services.

​Usually a prime brokerage is a large, well established financial institution with the ability to offer services to other large financial institutions. Some examples of prime brokerages include Goldman Sachs, Morgan Stanley, Merrill Lynch or Price Markets. Once there is active trading on a large scale, the services of a prime broker are usually required.

Prime Brokerage Role Explained

Prime Brokerage

Large investors include pension funds, hedge funds, commercial banks and so on. These large investors usually make investments on behalf of their members. Due to the size of these institutions and the resources they usually have at their disposal, they have the ability to access investment options that are not usually available to smaller retail investors. The reason is that they can offer very good rates to their own clients or members.

A large investor such as a commercial bank would have a large cash base from which it can lend to other large investors who may require funds for margin investment purposes. A hedge fund or pension fund, on the other hand, will have a large pool of securities which it can lend for the purposes of short-selling.

​The prime brokerage would act as the middleman, facilitating the borrowing of funds from the commercial bank for margin purposes and the lending of securities for short-selling purposes.

Trade Clearing and Settlement Services offered by Prime Brokerages

Prime brokerages may also offer trade clearing and settlement services to its clients. These services are optional and are only accessed if the client wishes to use them.

Each trading day, all trades need to be cleared and settled. This is the process whereby all trading accounts are updated and arrangements are made for the transfer of both money and securities in accordance with any trading that was conducted throughout the day.

​All orders are therefore reconciled and all accounts settled before the next day of trading takes place. While individual institutions (such as hedge funds) may choose to do this themselves, most usually opt to have this handled by the prime brokerage to simplify the process and to make it more efficient.

Prime Brokerages and Capital Introduction Services

Prime Brokerage

​The clients of a prime brokerage usually require capital introduction services. This involves a process whereby the brokerage will make targeted client introductions to help with the finding of investors. The prime brokerage will usually introduce their clients to the best pension funds, endowment funds or private banks available.

​In addition, access may also be granted for clients to the derivatives trading desks of the prime brokerage. These services are usually in high demand because they relieve the clients from having to worry about finding investors on their own. For a fee, they outsource this responsibility to their prime brokerage firm.

Concierge Services

​Concierge services do not only apply to the hospitality industries only anymore. Increasingly, concierge services are becoming popular in the financial industry as well. In addition to the leveraging, lending and cash management services, a prime brokerage may also offer what are called concierge services. Just like in the hospitality industry, concierge services in the financial industry refers to the offering of additional services that will help clients to save time.

​Since large institutions usually have several different clients who they have to cater to, they may not have the time to dedicate to doing certain things such as risk assessment and performance analytics. These services help clients to better understand the risks involved in the transactions that they execute as well as give them a summary of how their investments are performing.

​In turn, these large institutions can provide regular reports and analytical information to their own retail clients. For a fee, these concierge services may be accessed from the prime brokerage.

Choosing the right Prime Brokerage

Prime Brokerage

​Prime brokerages provide services that are essential to the smooth operation of the parties involved. It is therefore important that the right brokerage is selected.

Several factors should be considered when choosing the best prime brokerage firm. The most important factors include costs, scope of access to markets, general customer service as well as confidentiality.

Costs for accessing prime brokerage services may differ significantly between firms. Keeping costs to a minimum (especially orders execution costs) should be among the priorities when seeking the best prime brokerage. This will obviously facilitate bigger profits.

However, costs should not be the only determinant. Scope of access to markets is also important since limited access can significantly affect demand and therefore earnings. It is important that the leading financial markets are accessible, including those that may be considered as illiquid. At the very least, all the major exchanges should be available.

In the financial markets, customer service is often an area of competitive advantage. The organization that can better meet the needs of its clients will have an edge in many cases. Therefore, the prime brokerage that you select should be one that has a reputation for providing world class customer service. Anything less than world class service should not be acceptable.

​Finally, when selecting a prime brokerage, you want to ensure that trading confidentiality is a priority. This is an area of concern for many traders and therefore should be a given for every prime brokerage firm.