Prime Brokerage

Another classification of broker is the prime brokerage. Briefly, it is a firm that engages in services that are considered out of the ordinary. For example, accounts with very large dollar amounts being committed to trade. Typically, the services are provided to a select group of clients. Additionally, the funds that are managed by these brokers tend to require special attention. Hedge funds were original examples of this concept. Usually, the bigger, major firms are characterized as prime brokerages because they have the leverage and resources to administer these portfolios. They are also well-known, and attract a certain type of clientele.

Some of the services that are provided by the leading firms dealing in prime brokerage are securities lending, securities borrowing, financing solutions through hedge funds, new capital acquisition, credit derivatives intermediation, clearance and settlement services, risk analysis and reporting, technological support, consulting, and execution of trade orders in options, securities, foreign exchange, futures, and derivatives. Since prime brokerage are the keepers of the assets, because they are responsible for their clients' monies, in order to improve a fund's performance, they interact with clients to unite financing, capitalization, and borrowing.

Typically, prime brokerage firms work on a global scale, and have experts in all fields throughout the world. Thousands of people work in their various offices in different countries. Their years of expertise, and the volumes of historical data that they hold in proprietary databases is enormous and of great benefit to clients who have the resources to participate or contribute.

Traditionally, one of the benefits of prime brokerage has been the ability to stay with one company or custodian, as it is called, but make trades at another. The settlement services are provided by the client's own company, avoiding the issue of having multiple accounts with multiple prime brokers. And, because resources are tight in this economy, the creators of the funds are more than happy to deal with several prime brokers, in order to leverage their access to pools of capital and resources.

One concept of prime brokerage that proves interesting to many people is that prime brokerage is a form of currency. Since the funds involved allow access to capital resources, it means that when capital is scarce, the fund creators have the leverage to access resources that normally would not be available to them. Working with an investment bank, for instance, would not be option without the hedge fund.

Moreover, clients who use prime brokerage services need more personal service, meaning that their monies must be continually monitored and micro-managed. Activity is a daily and nightly occurrence, and the stakes are high. Other clients, for example, that must raise capital quickly will have access to investors who can help.

An important feature of prime brokerage is the limitation of risk. While it is conceded that all investment carries risk, most transactions, especially hedge funds, must exclude high risk ventures. In other words, all start ups are agreeably precarious to an investor, and would not be part of the bundled services or package offered.