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I understand that there exist direct stock plans that allow you to buy shares directly from a company. However, these have obvious and large downsides, so we can disregard them. Furthermore, I am not talking about brokers who give investment advice and similar services, but only referring to a brokerage service or processing transactions for an investor.

Therefore, why cannot every investor connect directly to an exchange and make transactions there, rather than requiring a middle-man in a form of a brokerage? I am aware that this would require some adjustment on the exchange side, but they are incentivized as they would be able to use this as an expansion of their business operations.

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    $\begingroup$ The broker provides a "place" to keep your stocks. Nowadays they are in electronic form, not paper certificates with your name on it. So you need some software/database, and some administrative functions have to be performed (sending you dividends (and reporting them to the govt), locking up your shares if you pledge them for a loan, sending notices of shareholder votes). The broker provides this and interfaces not only with the exchange but also with the stock clearing org NSCC and the IRS. It would be complicated for a person do this (so-called back office work) themselves. $\endgroup$
    – nbbo2
    Commented Mar 15, 2022 at 11:20
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    $\begingroup$ In addition, the brokerage takes the settlement and credit risk of facing the investor, which is something the exchange does not want to do. $\endgroup$
    – dm63
    Commented Mar 15, 2022 at 14:23
  • $\begingroup$ @nbbo2 isn't the "place" for stock-keeping in a central securities depository? As for the other functions, I don't see why wouldn't exchange be able to do this. $\endgroup$
    – cc88
    Commented May 11, 2022 at 3:30
  • $\begingroup$ @dm63 why wouldn't the exchange want to do that (along with other things, for a fee)? $\endgroup$
    – cc88
    Commented May 11, 2022 at 3:31
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    $\begingroup$ @cc88 mostly because the sheer volume of customers and administration required makes it a quite different business model. You could say the exchange has the product and the brokers are the distributors. Yes they could vertically integrate, but it’s not obvious. $\endgroup$
    – dm63
    Commented May 11, 2022 at 19:30

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