An outside broker invests in stocks or real estate, but is not a member of a stock exchange, and may trade high-risk securities that agency brokers won’t manage. They may also act as a buyer’s broker in real estate transactions. Government requirements must still be met to actively trade securities.
An outside broker is an individual who invests in the stock market or real estate, either on his own behalf or on behalf of his clients, but is not a member of a stock exchange. As only members of a stock exchange can officially transact, an outside broker passes your exchange-based trades to a member of the relevant stock exchange. The exception to this is a security that is traded directly (OTC) or electronically outside of actual stock exchanges that an outside broker deals with.
Certain securities do not meet the requirements to be listed on a stock exchange due to limited trading volume, insufficient capitalization by the company and others. These bonds, which are often referred to as cents, are considered high-risk investments that agency brokers will not manage. One of the primary duties of an outside broker, therefore, is to trade these types of securities for interested investors.
Real estate can also involve an outside broker when an agency represents both the buyer and seller of a property. To avoid conflicts of interest in the transaction, the agency may hire an outside broker to act on behalf of the buyer or seller. In real estate, an outside broker may be called a buyer’s broker when he is an independent agent who helps a client find a home or commercial property at a fair price by working with other real estate agencies and their listings.
In the past, especially in the UK, outside broker jobs were disparaged as crooked activities and were referred to as “shop keeper”. In reality, a commission broker would not buy or sell securities, but would instead place bets on whether they would increase or decrease in value on behalf of clients. This was similar to the gambler’s trade, although many bucket-holders ran legitimate businesses. The practice was also common in the commodity market centered on Chicago, USA, in the early 19th century, known as “the wheat pit”.
While the requirements for outside brokers may be more lax than those for an agency-registered broker, some government requirements still need to be met to actively trade securities. In the US, a broker needs to work for a brokerage firm for four months before he can take the Registered Securities Examination, after which he or she can trade on their own. Some US states also require a broker to pass the state securities brokers’ law exam. Other nations have similar requirements, with Canada requiring brokers to be licensed with approval of two parts of the Canadian Securities Course (CSC) and Conduct Practices Handbook. In Hong Kong, a broker is required to work at a licensed brokerage firm for three years and two exams are required in the UK under Title XII, the Chartered Institute for Securities and Investment.
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