Prime Broker vs Executing Broker in Trading

Updated July 7, 2022 Guides

There are a few different types of brokers in the financial markets. Retail traders typically don’t come in contact with prime brokers, as prime brokers are typically used by institutional traders to buy and sell securities.

Another type of broker is an executing broker. Executing brokers are responsible for completing trades on behalf of their clients. Retail traders typically come in contact with executing brokers rather than prime brokers.

What Is A Prime Broker

A prime broker isn’t typically something that retail traders would come across — it is used by institutional traders such as a hedge fund.

Prime Brokerage offers a suite of services to hedge funds and institutional traders to complete major transactions. A prime brokerage allows a client to source liquidity from a variety of executing brokers while maintaining a credit relationship, placing collateral, and settling transactions. Examples of prime brokers include investment banks such as Goldman Sachs, JPMorgan Chase, and Credit Suisse.[1]

Typical Participants

Prime brokerage emerged in the earlier 1990s. It gained momentum in the late 1990s when several banks entered the prime brokerage business with dedicated market and sales efforts, as well as tighter and more formal operational procedures.

In forex markets, prime brokerages have typically been used by hedge funds and commodity trading advisors (CTAs). Now, a prime broker is one of the crucial business partners for a hedge fund, and the first order of business for a hedge fund often includes appointing a prime broker.

Although the development of prime brokerages largely coincided with the growth of the hedge fund industry, the modern prime brokers have a diverse client base, including hedge funds, CTAs, small banks, asset managers, endowment funds, foundations, and partnerships, private family offices, and pension funds.[2]

Core Services of A Prime Broker

A prime broker aims to provide a one-stop service — it provides market liquidity pools, maintains credit relationships through margin financing and securities lending, holds collaterals and completes transaction settlements for the institutional clients. These services allow institutional clients to borrow securities and cash to trade on a netted basis and obtain an absolute return.[3]

Benefits of Using A Prime Broker

Traditionally, the strongest benefit of a prime broker is improving efficiency. This means that when the prime broker is informed of the transaction by both the client and executing dealer, the prime broker (and not the client) becomes the party to the transaction with the executing dealer.

However, with new financial technology, prime brokers have now begun to provide trade execution via electronic communication networks (ECN) and electronic broking platforms. These platforms allow for algorithmic trading — trading through an API that provides access to executable prices via a two-way message interface between the market and a client’s internal trading infrastructure.

This means that not only the prime broker is the party of the transaction with the executing dealer, but the identity of the client is also completely withheld.[4]

Executing Brokers

Executing brokers are often housed under a prime broker who offers a one-stop-shop service for large active traders.

The function of the executing broker is to locate the securities for a buy order or to locate a buyer for the sell order. This intermediary service is essential because a transaction must be done with speed and at a low cost for the client.

The executing broker is compensated through a combination of commissions and the bid-ask spread. The executing broker will also pass the trade to be executed by the clearing group of the prime brokerage.

Executing Brokers and Retail Traders

As the name suggests, an executing broker is a broker or dealer that processes a buy or sell order on behalf of a client. As a result, orders initiated by retail traders are eventually processed by executing brokers.

Nowadays, retail traders typically trade through online platforms which have risk parameters built-in through the Know Your Client (KYC) process. The electronic platforms will screen for violations of the risk parameters based on the KYC, and if an order is accepted, it is processed by the executing broker who has the duty of “best execution,” meaning offering the most favorable terms of execution.[5,6]

Relationships Between Prime Brokers and Executing Brokers

A prime broker client conducts trade with an executing dealer in the name of its prime broker. When the prime broker is informed of the transaction by both the client and the executing broker, the prime broker becomes the party to the transaction with the executing dealer.

The prime broker and the executing broker confirm and settle the trade, while the prime broker settles with the client on a net basis. The fee for using the services of the prime broker is determined by the agreement with the client and is typically based on the transaction volume.

In the provision of services, a prime broker is a general practitioner. An executing broker, on the other hand, is a specialist.

Prime brokers provide an entire suite of services, beyond simply trade execution that executing brokers would provide. Executing brokers specialise in the execution of specific asset types, such as CFDs on equities, futures, forex bonds, etc. Some also specialise in specialised assets, have special execution algorithms, or have high-frequency trading (HFT) infrastructure available for client use.

Prime brokers and executing brokers form market infrastructures that allow for the efficient functioning of the financial markets, and the institutional traders will often use both in their trading. This is because, given the size and depth of the financial markets, no broker has an exhaustive list of all of the potential counter-parties suitable for a client’s transaction. The more access a client has to a variety of brokers, the more access he has to the liquidity from different sources.


In conclusion, prime brokers and executing brokers play a vital role in the smooth functioning of the financial markets. Together, they facilitate the matching of buyers and sellers, provide liquidity and fast execution, as well as efficient and reliable order routing and order clearing.

It is through these collective mechanisms in the financial markets that allow our trade orders to be executed within a mere fraction of a second.

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  1. “Prime Brokerage 101 – Forbes” Accessed 6 Apr. 2022.
  2. “Forex Exchange Prime Brokerage Product Overview and Best Practice Recommendation – Federal Reserve Bank of New York” Accessed 6 Apr. 2022.
  3. “The Role of a Prime Broker – Investopia” Access 6 Apr. 2022.
  4. “Forex Exchange Prime Brokerage Product Overview and Best Practice Recommendation – Federal Reserve Bank of New York” Accessed 6 Apr. 2022.
  5. “Executing Broker – Investopia” Access 7 Apr. 2022.
  6. “Trade Execution –” 16 Jan. 2013, Accessed 15 Jun. 2022.

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