I am trying to read some literature on Prime Brokerage. In context of prime brokerage, primarily we have 4 participants


Executing Broker (EB)

Prime Broker (PB)

DTC (it could be specific to the region)

Why would a customer go to an EB assuming that he already is availing services of PB ? In other words, is it too costly for PB to be an EB as well ?


A prime broker is like a General Practitioner doctor. Executing Broker is like a specialist. If you needed brain surgery, you would not have your GP do it. Executing brokers specialize in specific types of, well, execution - equities, bonds, futures, etc. They may further specialize in high touch (sales trader) working orders, providing algorithms (CS AES for example), or have HFT infrastructure available for client use. Yes, a PB can offer most of these services, adequate at all, great at maybe 1 or 2, perhaps. You go to an EB that specializes in the type of market access and execution services required.

  • $\begingroup$ I would add that it is relatively easy for a group of talented and hard working people to start a small EB that provides a worthwhile service to a niche of clients, whereas a PB tends to be a large organization requiring a larger investment and a bigger infrastructure built up over many years. So they are different kinds of organizations, meeting different client needs. There are many EB in the ecosystem, relatively few PBs (many ants, few tigers in a given land area). $\endgroup$ – noob2 Sep 10 '20 at 12:12

In other words, is it too costly for PB to be an EB as well?

Answering your second question first, PB's are EB's; they just provide an entire suite of products and services beyond just trade execution that an EB would provide. If you have an account with a prime broker, they can undoubtedly execute trades, and you wouldn't necessarily need an additional EB.

Why would a customer go to an EB assuming that he already is availing services of PB?

The answer here may be more obvious than you realize. No broker, whether they are prime or executing, has an exhaustive list of every single potential counterparty out there. The more brokers you have, the more access you may get to liquidity from different sources. This is especially useful cases where you have an EB that specializes in trading certain products or securities that other EB's or PB's do not. For example, I am looking for a large number of shares in a company whose stock isn't very liquid. Instead of trying to execute this myself with a generic algorithm (VWAP, TWAP, or something similar), I decided to call my brokers to see if they can source some large blocks for me. Traders at my PB and my EB, separately and simultaneously, are sent requests to look for blocks of shares on my behalf. There is no telling which trader, if either, will be able to source the shares for me but, I have a better chance with 2 traders on the hunt than 1.


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