Unit 5

Security Brokerage
Security brokerage: meaning of brokerage, types of brokers.
What is a Brokerage?
A brokerage provides intermediary services in various areas, e.g.,
investing, obtaining a loan, or purchasing real estate. A broker is an
intermediary who connects a seller and a buyer to facilitate a transaction.

Individuals or legal entities can act as brokers. The broker performs its
actions according to the client’s instructions. The broker is then
compensated, receiving either a flat fee or a certain percentage of the
transaction amount.

 A broker is a mediator between the buyer and the seller and who receives
a payment in the form of a commission.
 The main function of a broker is to solve a client’s problem for a fee. The
secondary functions include lending to clients for margin transactions,
provide information support about the situation on trading platforms, etc.
 The three types of brokerage are online, discount, and full-service
brokerages.

Types of Brokers
Business Broker:-

A business broker helps clients buy or sell businesses. Typically, business

brokers only work on selling and purchasing companies worth less than $1
million, while mergers and acquisitions (M&A) managers and investment
bankers handle sales of larger businesses. Business brokers have similar
responsibilities as M&A managers and investment bankers, though.

Customs Broker

Customs brokers work directly with importers and exporters to ensure that the
movement of goods meets federal regulatory standards. These brokers relay
pertinent information and payments to the U.S. Customs and Border Patrol. A
customs broker also provides information to importers and exporters, so they
can understand what the requirements are and what clearances are required.
Data Broker

Also known as information brokers, data brokers are individuals or companies

that collect data from various sources and then sell or license the data to third
parties, like advertising companies. Using sources like social media and public
records, data brokers gather details about people, such as names, addresses,
phone numbers, incomes, and occupations.

Insurance Broker

Insurance brokers work with their clients to find the right policy for the clients’
individual needs. Because they are not tied to a specific insurance provider,
insurance brokers can sell policies from various insurance companies. As a
result, insurance brokers may offer a variety of insurance products ranging
from personal auto coverage, homeowners insurance, and life insurance.

Mortgage Broker

Mortgage brokers assist hopeful homebuyers with finding mortgage loans

from various lenders so they can choose the best rates and terms.
Additionally, mortgage brokers act as an intermediary between lenders and
borrowers, organizing and gathering paperwork from borrowers and ensuring
its relayed accurately to the lender.

Real Estate Broker

A real estate broker works for either a real estate buyer or seller to negotiate
sales and manage documentation involved in closing real estate transactions.

“With their sellers or buyers, brokers find a buyer or home for sale,
respectively, and draw up contracts for the impending transaction,” says Matt
Woods, co-founder and CEO of real estate brokerage SOLD.com.

Stockbroker

Stockbrokers are financial entities that trade securities (tradable assets such
as bonds, stocks, or options) on behalf of clients. Stockbrokers also provide
other services like investment management and giving financial advice

There are three types of stockbrokers:

 Discount stockbrokers manage trades and take low commissions on

deals, but they can’t provide financial or investment advice due to
having different licensing and registration.
  Full-service brokers, or advisory brokers, can provide insight to their
clients on when and where to trade, but they typically take higher fees
because of this advice.
 Discretionary stockbrokers can choose and make trades without
consulting the client, but their asset management typically includes a
heftier price tag.
Difference between broker and jobber:-
SEBI regulations relating to brokerage business in India:-
The Securities and Exchange Board of India (SEBI) regulates the securities market in India,
including the brokerage business. SEBI’s regulations ensure fair practices, protect investors,
and maintain the integrity of the market. Key SEBI regulations that govern the brokerage
business in India include:

1. Registration of Stock Brokers

 SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 mandates that no person
shall act as a stockbroker or sub-broker unless registered with SEBI.
 Brokers must meet minimum financial requirements, pass certain qualifications, and
comply with other regulatory conditions to get licensed.

2. Capital Adequacy Requirements

 SEBI has set minimum net worth and capital adequacy requirements for stockbrokers,
depending on the nature of their operations (e.g., trading members, clearing
members).
 For example, brokers must maintain a base minimum capital (BMC) with the stock
exchanges to handle risk and settle trades.

3. Code of Conduct for Brokers

 SEBI mandates a strict code of conduct for stockbrokers, covering areas like integrity,
fairness, due diligence, and conflict of interest.
 Brokers must act in the best interests of clients, maintain confidentiality, and provide
fair and transparent service.

4. Client Account Management

 Brokers are required to maintain separate client accounts for funds and securities to
avoid misuse or commingling of funds.
 They must adhere to SEBI (Stock Brokers and Sub-Brokers) Regulations on
margin requirements and settlement procedures to protect investors’ interests.
 Periodic reconciliations of client accounts and reporting to the exchanges are
mandatory.

5. Investor Protection Measures

 SEBI mandates the creation of an Investor Protection Fund (IPF) at stock exchanges
to compensate investors in case of broker default.
 Brokers must also adhere to grievance redressal mechanisms for resolving investor
complaints.

6. Margin Requirements
  Brokers must collect margins (initial and maintenance margins) from clients to cover
potential losses during trades. These margins are regularly monitored by the stock
exchanges.
 SEBI has prescribed strict margin rules under various circulars, and failure to collect
appropriate margins could result in penalties.

7. Disclosure Requirements

 Stockbrokers must disclose all relevant information about their services, charges, and
risk factors to clients before entering into a contractual relationship.
 Periodic reporting of financials, ownership structures, and operational details to SEBI
and the exchanges is mandatory.

8. KYC and AML Compliance

 Brokers must comply with Know Your Client (KYC) norms to verify the identity of
clients before opening accounts.
 Anti-Money Laundering (AML) regulations also apply to brokers, requiring them to
monitor and report suspicious transactions.

9. Algorithmic Trading

 SEBI has introduced guidelines for algorithmic or high-frequency trading.

Stockbrokers using algorithmic trading must register their algorithms with the
exchanges, and the systems must adhere to strict risk management measures.

10. Prohibition of Unfair Practices

 SEBI regulates broker conduct to prohibit insider trading, front running, and other
forms of market manipulation.
 SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP)
Regulations, 2003 lays down rules that brokers must follow to ensure fair trading
practices.