What’s a member firm?

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A member firm is a brokerage with an officer who is a member of a major stock exchange or clearinghouse, granting broader trading powers on the exchange floor. Allied members enjoy similar benefits. Becoming a member requires buying an exchange floor seat, costing over $1 million. The member firm officer can execute orders for clients and their own investment portfolio, subject to trading regulations and exchange standards.

Also known as a clearing member, a member firm is a brokerage that has at least one officer who is a member of a major stock exchange, such as the New York Stock Exchange (NYSE). This status is also granted to any brokerage or dealership where one of the firm’s officers is a member of a clearinghouse or other type of business that conducts business on an exchange and is classified as self-regulatory. Typically, a member firm has broader trading powers on the exchange floor than other brokers, making it easier to execute orders on behalf of clients.

Within the structure of a member firm, certain individuals may also be considered allied members. This designation extends to company officers who do not have direct membership in a major stock exchange, but have a connection through the courtesy of another officer who is a member of the exchange. Allied members also enjoy a variety of benefits associated with this designation, including the opportunity to manage certain types of transactions on behalf of clients and the company. The exact scope of the authorization granted to an allied member depends on the guidelines and regulations established by the exchange in question.

Becoming a member firm requires a significant level of commitment to the exchange. Usually, you need to buy what is called an exchange floor seat. The cost of the purchase will vary from exchange to exchange, generally requiring an amount in excess of $1 million US dollars. For larger businesses, this cost is typically offset by the ability to transact on the floor in real time, which in turn increases the commissions and fees charged to clients.

The member firm officer holding that position on the exchange will often use the privileges to execute orders for clients, but also has the ability to use that presence as a means to execute orders for their individual investment account. Most exchanges place some limits on trading a personal account, which in turn helps minimize the chance of insider trading. As long as the transactions are conducted in accordance with applicable government trading regulations and exchange standards, the member firm officer may execute orders for both clients and their own personal investment portfolio.

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