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Would it be considered appropriate risk-management or overkill to utilize multiple brokers to manage a given trading strategy?

A couple specifics:

  • I'm interested in what a reasonably-sized hedge fund might typically do, not an individual day trader.
  • Let's assume major equities and that either broker could easily handle the whole strategy alone; the point is avoiding the risk of one broker being unavailable or unable to execute a trade.
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If you're large and successful there is also the risk of your strategy being front-run or reverse engineered by a single broker which would be mitigated by using multiple brokers. –  Joshua Chance Apr 29 '11 at 18:31
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2 Answers

up vote 6 down vote accepted

The shops I've worked for have had access to multiple brokers, but not for redundancy as your question implies. It's often because no one broker can handle every task.

For example, I might need a floor broker, a dark-pool broker, an algo broker, and a separate prime broker. Each agency handles a different requirement. Even if one broker could handle all of these tasks, it may be more cost effective to pick and choose. (An analogy on the retail side is that I can have a credit card, checking account, and IRA from separate banks just because the rates are better.)

So yes, it's common to have multiple brokers, but not for risk reduction. It's just to silo the required tasks.

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Can't speak to the cash equity space, but at futures shops I think it is common to have the phone number of a give-up broker in case the power goes out or something, but it is uncommon to ever use them.

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