Chapter 7 Part 2

Broker services
Introduction to broker services in secondary market

A broker can refer to the role of a firm when it acts as an agent for a customer and charges the
customer a commission for its services.

Because securities exchanges only accept orders from individuals or firms who are members of
that exchange, individual traders and investors need the services of exchange members. Brokers
provide that service and are compensated in various ways, either through commissions, fees, or
through being paid by the exchange itself.

A broker never acts as a principal in a transaction while facilitating trade; instead, he or she acts
as an agent.

Functions of brokerage firms

The main function of a broker or a brokerage firm is to solve the client’s problems for a fee.
However, there are other broker functions existing today. A brokerage can:

1. Execute trades on the financial markets at the expense of the customer and on his behalf.
2. Provide information support about the situation on trading platforms, sending
notifications about quotes and trading mechanisms.
3. Provide information about other market participants, making the correct decision for the
client to conduct the transaction.
4. Lending to clients for margin transactions.
5. Storage and protection of customer data.
6. Creating a technical base to make transactions on the exchange.

Certainly, broker companies carry out a broader activity besides mediation. Without a broker, the
financial market itself would not exist.

Types of brokerage firms:

There are two main types of Brokerage firm. – Full-Service Brokerage and Discount brokerage
firm.

Full-Service Brokers
A full-service broker is a professional stockbroker who advises their clients about which
securities they should buy or sell in order to reach their goal. A full-service brokerage provides a
wide range of professional services to customers, such as Tax tips, Investment advisory, equity
researching etc. Someone who doesn’t have time to do their own financial and investment
planning might find these types of brokers useful. Full-service brokerage firms normally work
for a fee that is higher than other brokers because of the array of services that they offer.

Full-service brokers offer a variety of services, including market research, investment advice,
and retirement planning, on top of a full range of investment products. For that, investors can
expect to pay higher commissions for their trades. Brokers receive compensation from the
brokerage firm based on their trading volume as well as for the sale of investment products. An
increasing number of brokers offer fee-based investment products, such as managed investment
accounts.

Discount Brokers

A Discount brokerage firm is a stockbroker who carries out buy and sell orders at reduced
Commission rates compared to a full-service broker. They are known for offering low-cost
brokerage. Due to this reason, they offer essential services only. For example, undertaking,
buying, and selling of orders. A discount broker does not provide investment advice or perform
analysis on a client’s behalf. Due to this reason their brokerage charges are less.

A discount brokerage firm use online platforms to provide services to clients. The investors can
execute trade electronically via an app or website. Many discount brokers also have educational
tools and resources available to help guide your investing.

Key differences between Full-Service Broker and Discount broker:

BASIS FOR FULL-SERVICE BROKER DISCOUNT BROKER

COMPARISON

Meaning A full-service broker is a financial A discount broker, on the other

professional or firm that offers a hand, is a financial professional or
comprehensive range of brokerage firm that primarily focuses on
 and advisory services to clients. executing trades at a lower cost.

Brokerage charges Typically charge higher Offer lower trading commissions

commissions or fees for their and may have fewer account fees.
comprehensive services.

Services provided Offer a wide range of services Offer minimal or no investment

beyond just executing trades. They advice, research, or financial
provide investment advice, planning services. Their main
portfolio management, financial advantage is low-cost trading.
planning, research reports, and
access to various investment
products and markets.

Suitable for Beginners and Busy people Those who have got time and
knowledge to research on their
own or have a financial advisor.

Customer Support Offer more personalized customer Provide customer support but may
support and assistance. not offer the same level of
personalized service as full-service
brokers.

Top 12 Stock Brokerage and Security House in Bangladesh

1. Lanka Bangla Securities Ltd.

2. Royal Capital Ltd.
3. Islami Bank Securities
4. Midway Securities Ltd.
5. BRAC EPL STOCK BROKERAGE
6. EBL Securities Limited
 7. MTB Securities LTD.
8. IDLC Securities Ltd.
9. City Brokerage Ltd.
10.Sheltech Brokerage
11.UCB Stock Brokerage Ltd
12.SIBL SECURITIES LIMITED

Brokerage services

Brokers can provide a wide range of different services. Here are some examples of
the different types of brokering services available to clients and interested parties:

Stocks

A stock brokerage or stockbroker is an intermediary who specializes in carrying

out buy and sell orders on stock or commodities markets for clients. They
essentially carry out investments and sales according to the client's demands and
needs, and it can be beneficial for those who don't have the time or knowledge to
carry out investments themselves to hire a stockbroker to do this for them.

Credit

A credit broker is a broker who specializes in the brokerage of credit. In other

words, they can help people get credit in the form of loans or lines of credit,
connecting consumers to creditors and lenders who are willing to provide those
kinds of financial services.

Real Estate

Brokers are big parts of the real estate world, with many buyers and sellers of real
estate calling on the services of brokerage firms to help negotiate the sales of
properties. Brokers can help both parties come to an agreement on the price and
terms of a real estate sale, simplifying the process for both sides.

Business

Business brokers or brokerages are those that specialize in the buying and selling
of privately-owned companies. For example, a small business owner looking to sell
their business for the right price may bring in a broker to help facilitate the process
and ensure that the owner gets a fair valuation and adequate terms for the sale.

Forex (foreign exchange)

Forex brokers specialize in the Forex (foreign exchange) trading market. This
market offers limited access to interested traders, and many people have to make
use of brokerages in order to actually buy and sell on the Forex platform.

Insurance

Brokers also play a key role in the insurance industry. They can have a range of
roles and responsibilities, such as helping those who are searching for insurance
get the best possible policies, as well as assisting insurance companies in drawing
up adequate policies for applicants and attracting more customers, too.

Prime

A prime brokerage is one that offers a range of financial services centered around
large and complex operations like hedge funds. They assist with the mediation and
processes involved in facilitating complicated trades and transactions and are
typically employed by some of the biggest financial institutions in the world.

Futures
There are also futures brokers and brokerage firms, providing brokering services
focused around futures contracts. Futures contracts are essentially agreements that
are made between two parties concerning the transaction of an asset or product at a
certain price and time in the future.

The Commodity Futures Trading Commission (CFTC) regulates the buying and
selling of futures contracts, which is also known as derivative trading.

Investment Funds

Many brokerages, particularly broker-dealers, offer investment funds as tradeable

securities. These funds are priced based on the performance of an industry,
financial market, or stock exchange and offer investors a streamlined way to
diversify their portfolios.

The mutual fund is one of the most time-honored examples of an investment fund.
These investment vehicles are a pool of invested funds that are actively managed to
best represent the fund's goals. Mutual funds can only be traded at the end of the
trading day and often come with fees and investment minimums.

Another recent entry to the investment fund marketplace is ETFs acting similarly
to mutual funds. However, they are passively managed and can be traded similarly
to stocks. As such, they are often free of fees and investment minimums.

Retirement Accounts

Brokerage firms can help individuals and businesses maintain retirement accounts
that are easy to use and tuned to investors’ financial goals

Major firms such as Fidelity and Vanguard offer individual retirement accounts
(IRAs), employer-sponsored 401(k) plans, and other investment vehicles to help
you and your employees plan for retirement.
Brokerage Fees and Commissions

Brokerage fees are what a broker charges for various services, like subscriptions for premium
research and investing data or additional trading platforms. In Bangladesh, all brokerage houses
charge a certain percentage of commission on each transaction. Usually, that amount ranges from
0.25% to 0.50%. The three main types of brokers that charge brokerage fees are full-service,
discount, and online.

Full-service brokerage fees

Full-service brokers offer a wide range of products and services such as estate planning, tax
consultation and preparation, and other financial services. As a result, they earn the largest
brokerage fees. Not so long ago, it was not uncommon for a full-service broker to charge upward
of $100 per trade for orders placed with a human broker. The standard commission for full-
service brokers today is between 1% to 2% of a client's managed assets. However, the
commission fee is set at maximum 1% on total trade value with prime rates applicable for prime
clients.

For example, Tim wants to purchase 100 shares of Company A at $40 per share. Tim's broker
earns a commission of $80 for facilitating the transaction ($40/share x 100 shares = $4,000,
$4,000 x .02 commission = $80). When the commission is added, the total cost of the trade is
$4,000 + $80 = $4,080.

Discount Brokerage Fees

Because discount brokers offer a narrower selection of products and provide no investment
advice, they charge lower fees than full-service brokers do. Discount brokers charge a flat fee for
each trade transaction. The per-trade flat fee ranges from $5 to $15 per per trade. Account
maintenance fees are usually around 0.5% per year based on assets held.

Online Brokerage Fees

Online brokers have the least expensive brokerage fees. Their primary role is to allow investors
to conduct online trading. Customer service is limited. Many online brokers have removed a
specific commission fee for trades on stock shares, but commission fees for options or futures
trades still apply. The fees vary and may be based on a per-contract or per-share charge. Account
maintenance fees vary between $0 to $50 per account per year.

In addition to the above-mentioned fees, there are some commissions that the brokerage houses
charge to their clients. Brokers charge a commission for each trade they execute on behalf of
their clients. This commission is often a percentage of the total trade value. The exact percentage
can vary between brokerage firms. Such as:

1. Transaction Fees: Some exchanges and trading platforms charge a fee for each trade
executed. This fee helps cover the cost of maintaining the trading infrastructure.

2. Market Data Fees: Traders and investors often rely on real-time market data to make
informed decisions. Exchanges and data providers may charge fees for accessing this
data.

3. Account Maintenance Fees: Some brokerage firms charge account maintenance fees,
annual fees, or other charges for the services they provide to maintain your trading
account.

4. Special Services: Some brokerages offer specialized services, research reports, or access
to advanced trading tools for an additional fee.

5. Inactivity Fees: Some brokerage firms charge inactivity fees if an account remains
dormant or inactive for a specified period. These fees encourage clients to remain
engaged in trading activities.

6. Regulatory Fees: In some cases, regulatory agencies charge fees to help fund their
oversight of financial markets. These fees are typically collected by brokerage firms on
behalf of the regulatory agencies and passed on to them.

7. Exchange Fees: Like regulatory fees, exchange fees are charged by the exchange where
the trade takes place. These fees contribute to the operation and maintenance of the
exchange platform.

Remember that the specific fee structure and commission rates can vary widely depending on the
brokerage firm, the services they offer, and the type of financial instruments you're trading.
Always carefully review a brokerage's fee schedule before engaging in any trading activities.
Broker Services for Individual Investors
Broker services for individual investors are financial services offered by brokerage firms to help
individuals buy, sell, and manage their investments in various financial markets. These services
cater to a wide range of investors, from beginners to experienced traders.

Some of the services that brokers offer to retail investors are:

1. A broker executes trading of stocks and bonds in the financial markets on behalf of retail
investors. In other words, brokers provide a platform where the investors can invest and
grow their idle funds.
2. As success in trading requires proper analysis of information for making appropriate
decisions, a broker generally stores all the necessary information to execute activities
profitably.
3. Provides information about the participants of the market.
4. Stores and provides data of both the stocks and the customers.
5. Lending to clients for margin transactions.
6. Creating a technical base to make transactions on the exchange.
7. Developing financial planning for utilizing clients’ funds.
8. Providing digital platforms to let clients communicate, get information, place order, and
remain up-to-date about the information.
Institutional Broker Services

Institutional brokerage services refer to specialized financial services offered by brokerage firms
to institutional clients, such as mutual funds, hedge funds, pension funds, asset managers,
insurance companies and other large entities.

Brokerage services tailored to institutional investors

1. Execution of Large Orders: Institutional investors often deal with large trading volumes
and substantial order sizes. Institutional brokerage services are equipped to efficiently
execute these large orders in a way that minimizes market impact and cost, often utilizing
advanced trading algorithms and technology.
2. Access to Multiple Markets: Institutional brokers provide access to various financial
markets, including equities, fixed income, foreign exchange, commodities, and
derivatives.
3. Research and Analysis: Brokerage firms that serve institutional clients typically provide
extensive research and analysis services such as market research, economic analysis,
company-specific research and sector-specific insights.
4. Trade Settlement and Custody Services: Institutional brokerage services help to
manage the settlement of trades, the safekeeping of securities, and the administration of
assets on behalf of their institutional clients.
5. Customized Trading Strategies: Institutional brokers work closely with their clients to
develop and execute customized trading strategies that align with the client's investment
goals, risk tolerance, and time horizon.
6. Risk Management: Brokerage firms provide risk management tools and strategies to
help institutions hedge their positions, manage exposure, and mitigate potential losses.
7. Compliance and Regulatory Support: Institutional brokerage services are
knowledgeable in regulatory requirements and help to ensure that institutional clients
comply with all relevant financial regulations.
8. Capital Introduction: Brokerage firms may help institutional clients by introducing
them to potential sources of capital, such as investors, counterparties, or strategic
partners, to facilitate business growth and fundraising.
Regulatory Framework for Broker Services (Bangladesh)
The regulatory framework of the capital market or the broker market of Bangladesh comprises
Parliament, the Ministry of Finance, the Securities and Exchange Commission (SEC), the Dhaka
Stock Exchange Ltd. (SEC) and the Chittagong Stock Exchange (CSE). The Bangladesh
Securities and Exchange Commission (BSEC) is the authority to monitor and control the
activities of the stock exchanges of Bangladesh. The BSEC is controlled by the Ministry of
Finance which is obviously empowered by the Parliament.

Bangladesh Securities and Exchange Commission (BSEC): The primary regulatory authority
overseeing the securities market in Bangladesh is the Securities and Exchange Commission
(SEC). The SEC was established under the Securities and Exchange Commission Act, 1993. It is
responsible for regulating and supervising all aspects of the capital market, including brokerage
firms.

Main functions of BSEC

 Regulating the business of the Stock Exchanges or any other securities markets.
 Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an
issue, underwriters, portfolio managers, investment advisers and other intermediaries in
the securities market.
 Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
 Monitoring and regulating all authorized self-regulatory organizations in the securities
market.
 Prohibiting fraudulent and unfair trade practices relating to securities trading in any
securities market.
 Promoting investors’ education and providing training for intermediaries of the securities
market.
 Prohibiting insider trading in securities.
 Regulating the substantial acquisition of shares and take-over of companies.
  Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self-regulatory organization
in the securities market.
 Conducting research and publishing information.

Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE):

Bangladesh has two full-fledged automated stock exchanges, namely, the Dhaka Stock Exchange
Ltd. (DSE) and the Chittagong Stock Exchange (CSE) whereas the Dhaka Stock Exchange Ltd.
is the prime bourse of the country. Through its highly fault-tolerant automated trading system,
the exchange can offer facilities for smooth, transparent and highly efficient provisions for
secondary market activities of shares, debentures and wide varieties of other securities.
Managed by a 25-member (13 after Demutualization) strong Board of Directors, the overall
operations of the exchange are professionally run by a team of qualified executives. The bourse
at present offers the trading facilities of 533 securities. With a nationwide membership of over
250 brokers and dealers, the DSE espouses the shared vision of Bangladeshi businesses
all over country. The exchange maintains the lead in providing the perfect launch pad to raise
capital by mobilizing savings of the people in general to set up large industries.

The DSE and CSE are the two major stock exchanges in Bangladesh. They play a crucial role in
regulating the operations of brokerage firms. These exchanges have their own listing
requirements, trading rules, and codes of conduct that brokerage firms must adhere to.

Analyzing notable brokerage-related events or scandals

There have been several notable brokerage-related events and scandals in the financial industry
over the years such as Enron Scandal (2001). Bernie Madoff Ponzi Scheme (2008), LIBOR
Scandal (2012), Wells Fargo Fake Accounts Scandal (2016), The Stock Market Crash in
Bangladesh (2011), GameStop Short Squeeze (2021). Here we discussed two of these case
studies and real-life examples:
Enron Scandal (2001):
Brokerage Involvement: Investment banks like Merrill Lynch and Citigroup were heavily
involved in underwriting and promoting Enron's securities.
Scandal Details: Enron, once a highly respected energy company, engaged in accounting fraud
to hide its debts and inflate its profits. Several years later after the foundation of company, the
founder Kenneth Lay developed a staff of executives that uses of accounting loopholes, the
misuse of mark-to-market accounting, special purpose entities, and poor financial reporting
which were able to hide billions of dollars in debt from failed deals and projects. Chief Financial
Officer Andrew Fastow and other executives misled Enron's board of directors and audit
committee on high-risk accounting practices and pressured Arthur Andersen (auditor and
consultant) to ignore the issues. Shareholders filed a $40 billion lawsuit after the company's
stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than
$1 by the end of November 2001. This led to its bankruptcy in 2001, one of the largest in U.S.
history. The company paid its creditors more than $21.8 billion from 2004 to 2012.
Consequences: Investors lost billions of dollars, and Arthur Andersen, one of the Big Five
accounting firms, collapsed. Regulatory reforms like the Sarbanes-Oxley Act were introduced to
prevent similar scandals.
The Stock Market Crash in Bangladesh (2011):
Brokerage Involvement: Brokerage firms were at the center of this crisis as they played a key
role in facilitating stock transactions. The crash exposed issues of market manipulation, lack of
regulation, and inadequate risk management within the brokerage industry.
Event of Scandal Details: In 2010-2011, the Dhaka Stock Exchange (DSE) experienced a rapid
rise in stock prices, followed by a sudden crash. Within December 2010 and January 2011, the
DGEN index fell from 8,500 by 1,800 points, a total 21% fall, with masterminds of the crash
making about BDT 50 billion ($ 667 million) out of the scam. This led to significant losses for
investors and triggered a crisis in the stock market. This event or scandal has been occurred due
to have influenced of some factors such as speculative bubble, lack of regulatory oversight,
margin trading, global economic uncertainty, overvalued IPOs, and Temporary Market Closures.
Consequences: Investors took to the streets with protests. Random objects like wood and papers
were set on fire in front of the DSE office in Motijheel.
Examining successful brokerage strategies or innovations
There have been several successful brokerage strategies and innovations that have reshaped the
financial industry. Here are some case studies and real-life examples:
Online Trading Platforms:
  Example: E*TRADE
 Innovation: E*TRADE was one of the pioneers of online brokerage platforms, allowing
investors to trade stocks and other securities online.
 Impact: This innovation democratized investing by providing easy access to markets,
significantly reducing trading costs, and enabling individuals to manage their investments
directly.
Discount Brokerage Model:
 Example: Charles Schwab
 Innovation: Charles Schwab introduced the discount brokerage model, offering lower
commission fees compared to traditional full-service brokers while providing a range of
research and educational resources.
 Impact: This model revolutionized the industry by making investing more affordable for
retail investors and led to a price war among brokerage firms, benefiting consumers.
Robo-Advisors:
 Example: Betterment and Wealthfront
 Innovation: Robo-advisors use algorithms to provide automated, low-cost investment
management services, eliminating the need for traditional financial advisors.
 Impact: Robo-advisors have made professional asset management accessible to a
broader audience, especially for those with smaller investment portfolios, with a focus on
low fees and portfolio diversification.
Mobile Trading Apps:
 Example: Robinhood
 Innovation: Robinhood's user-friendly mobile app allowed commission-free trading and
introduced features like fractional shares and options trading.
 Impact: Robinhood attracted a large user base, particularly among younger investors,
and challenged the industry's pricing structures, prompting other brokerages to eliminate
commissions.
Conclusion
In conclusion, broker services play a pivotal role in the secondary market, serving as the bridge
that connects investors to the vast world of tradable securities. We've explored the various facets
of brokerage, from the different types of brokerage firms to the regulatory framework and
various case studies of brokerage scandals and successful firms. As we look to the future, it's
evident that the landscape of broker services is continually evolving, driven by technological
advancements, and shifting market dynamics. It is imperative for brokers to navigate this
landscape with ethics, transparency, and a commitment to client interests.