A carrying broker handles transactions on behalf of another broker in exchange for a service fee. There are a number of reasons to use a carrying broker, including time restrictions, limited funds for back office operations, or inexperience in a given market. Such financial relationships require contractual agreements so both parties understand their responsibilities. They usually need to be registered with a given financial market and may need to meet other regulatory requirements. These protect the interests of their respective clients.
Brokers can be extremely busy, and may end up with more orders than they can comfortably fill. They can pass some on to a carrying broker to get them filled in a timely fashion, and can also use the services of an experienced broker if they have an order in a market they’re not overly familiar with, to get the best deal for a client. New brokerage firms can take advantage of a contract with a carrying broker to save on back office expenses by contracting these out and focusing on client relationships.
In addition to executing trades, the carrying broker can hold and update information as well as maintaining reserves of stock or cash on hand. It also handles clearance, making sure financial transactions run smoothly. These back office activities can require a large team of skilled and experienced staff members that may not be available at all brokerages, especially those just entering the market. Setting up a back office can be prohibitively expensive, while hiring a carrying broker is within reach of a new firm.
Clients of a brokerage can ask for information about contractual agreements it may have with a carrying broker to handle some or all trades. These agreements include specific terms to address concerns about conflicts of interest; brokers cannot, for example, execute trades that advantage them and harm their clients. This extends to a carrying broker, which can’t engage in activities like holding a trade back to benefit another client or itself.
Regulatory oversight over brokerages, traders, and other participants on the stock market includes audits of carrying brokers. They need to be able to provide information about their trades and clients for inspection. This can include records of contracts and agreements to demonstrate their legal relationships and provide proof the firm is operating within the law. In the event of a violation, brokerages and employees may be fined and other penalties, like jail time, could be considered.
