Financial markets have existed for many years now, with the first one rooting back to the 1600s. The market now includes millions of participants, traders, brokers, operators and other players in an organised ecosystem where everyone depends on each other.
Market dynamics have changed, and new services have made their way to the industry, providing legal assistance, technology, consultancy and more. Prime brokerage is an excellent example of an inclusive service provider that serves large corporations.
How do prime brokers differ from retailer brokers? Which one do you choose? Let’s explain the difference.
Let’s start by defining retail brokerage, which refers to providing intermediary services to individuals and companies who want to engage in financial markets, providing them with means to trade in stock, bonds, Forex, commodities, cryptocurrencies and more. Retail brokers charge commission fees in exchange for their services.
Prime brokers expand on the standard services offered by a retail broker, including more activities like asset management, financial consultancy, strategic planning, liquidity planning, legal compliance, etc.
Therefore, prime brokers include more services than the sole market order execution, which benefits large financial corporations. Hedge funds and multi-million dollar organisations that deal with massive capital and a large database of users and assets prefer prime brokers to support their business activities.
Prime brokers are in high demand because of the relatively new service bundles they offer compared to the industry standards, which supports these companies’ growth in the market, benefiting from the following advantages.
- Streamlining financial settlements, invoice management and accounts receivable/payables.
- Providing liquidity and access to market and financial assets like stocks, bonds, cryptos and other tradable securities.
- Managing cash flow from and to the company and overviewing liquidity levels to optimise financial efficiency.
- Holding and safeguarding the company’s capital in liquid and illiquid forms, including assets like stocks, bonds, gold, etc.
Market makers may look similar to prime brokers in terms of providing liquidity and promoting market efficiency. However, market makers are usually large firms that engage in trading markets, quoting prices and taking opposite sides of multiple trades, promoting liquidity and efficiency.
On the other hand, prime brokers provide services to large financial companies and hedge funds that promote their economic well-being, liquidity and growth.
Prime brokers offer all-inclusive services that range from simply executing market orders to borrowing, asset management, liquidity provision, custodial services and more. These services may extend to consultancy and strategic planning that improves that company’s financial position.