Reef Securities Inc. - Broker

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• Reef Securities Inc.

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What brokers do

• Brokers arrange trades for their clients
• Search for traders who are willing to trade
• Represent their clients at exchanges
• Arrange dealers to fill clients orders
• Introduce their clients to electronic trading
  systems
• Match clients buy and sell orders

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Types of markets

• Order flow markets (NYSE and NASDAQ)
• Brokers match clients buy and sell orders
• Block markets
• Brokers search for traders who will take clients
  order
• Offering markets (IPO and SEO)
• Brokers sell securities on behalf of issuers
• Mergers and acquisition
• Brokers find one or both parties

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Why brokers?

• Brokers can solve clearing and settlement
  problems at low costs
• Brokers can access exchanges and dealers that
  their clients cannot access
• Brokers know who are willing to trade
• Brokers are better negotiators
• Brokers can represent clients orders when they
  cannot represent them themselves

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Structure of a brokerage firm

• Front office operations
• All activities that involve client contact
• Back office operations
• All activities that support the front office
  operations
• Proprietary operations
• Cash and risk management activities and any
  speculative trading that the firm conducts for
  its own accounts

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Front office operations

• Sales and trading department
• Sales brokers interact with clients
• Floor brokers arrange trades at exchanges
• Corporate finance department
• Investment banking operations
• Research department (Use supplements)
• Analysts provide services to various departments
• Customer service department
• Help their clients manage their accounts

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Back office operations

• Maintaining accounts
• Clearing and settling trades
• Providing the information systems that the firm
  uses to transmit market data, quotes, orders, etc
• Ensuring that the firm extends credit only to
  good credit risks
• Ensuring compliance with regulations

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Proprietary operations

• All trading activities that the firm conducts for
  its house account
• For pure brokers, these include cash management
  and the borrowing and lending of securities
• Include principal trading as a dealer,
  speculator, or arbitrager

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Broker profitability

• Revenues
• Commissions (deregulated in1975)
• Soft commissions
• Payment for order flow
• Interest
• Underwriting fees (7)
• Mergers and acquisition fees
• Costs labor costs and interest payments

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Soft Commissions

• To obtain order flow under fixed commissions
  before deregulation (May 1975)
• To reduce expense ratios by minimizing hard
  dollar expenses after deregulation (because
  commissions are not treated as expenses)

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Principal-agent problem

• Performance measurement
• Public disclosure (SEC Rules 11Ac1-5 and 11Ac
  1-6)
• Best execution NBBOs and others
• Dual trading problem
• Internalized orders
• Front running
• Order preferencing
• Payment for order flow

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More on dual trading problem

• Dual traders trade both as dealers and as brokers
  (known as broker-dealers)
• They fill client orders themselves for
  internalized orders
• For client buy (sell) orders, they want sell
  (buy) at high (low) prices Conflict of
  interest!!
• They compete with clients when they want to trade
  on the same side of the market
• They want to trade first to get better price and
  also to benefit from the market impact of the
  others trades
• Front running
• Some markets prohibit all dual trading

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Dishonest brokers

• Front running
• Inappropriate order exposure
• Fraudulent trade assignment
• Prearranged trading and kickback schemes
• Unauthorized trading and churning
• Securities theft

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• https//sec.report/CIK/0000898982