Organization of Brokerage Firms

The firms that specialize in creating, trading and selling "securities" are often referred to as brokerage firms. Like any type of business, a brokerage firm has various departments to perform different functions, all of which are related in one way or another to the trading and selling of securities. However, not all firms have every department that follows. In fact, many small firms, called specialty firms or boutiques, perform just one of the functions.

Venture Capital [Back to the Top]

The venture capital division of a large firm ( or a small firm that specializes in venture capital) provides very small companies with "seed money." Newly formed companies need to research, develop, test and market new products or ideas. In exchange for providing the start-up capital, the venture capital usually acquires a partial ownership interest in the new company. This type of investment can be very risky as most start-up companies do not survive and grow.
Corporate Finance [Back to the Top]

The corporate finance department is responsible for raising capital for more established companies. The highly skilled professionals who work for this group advise the firm's corporate clients on the most cost-effective way for them to raise the capital needed to finance their growth. Usually this means selling new shares of stock or bonds of one type or another to investors.
Municipal Finance [Back to the Top]

The municipal finance department is responsible for assisting state and local governments in raising the money they need to build schools, roads, hospitals and the like. States and local governments raise capital primarily by selling bonds to investors. The principal attraction of municipal bonds is that the interest they pay can be exempt from federal income tax.

The Syndicate Department

The corporate and municipal finance departments do not sell securities. This task falls to the syndicate department, which coordinates the initial sale of new securities to both individual abd institutional investors. The work of this department is discussed in greater detail in the section on underwriting.

Institutional Sales [Back to the Top]

The institutional sales department is responsible for dispensing investment advice to, and soliciting securities orders from, the firm's institutional clients, such as banks, insurance companies, pension plans, and the like. The professionals who interact with these clients are called institutional brokers.
Retail Sales [Back to the Top]

The retail sales department is responsible for dispensing investment advice to, and soliciting securities orders from individuals. The professional responsible for performing this function are called retail brokers, registered representatives, or account executives.
Portfolio Management [Back to the Top]

Many clients who lack the time and/or the expertise to manage their own investments turn this responsibility over to a portfolio manager or investment advisor. This "advisor" can be either an individual or a firm. Individuals select portfolio managers on the basis of their investment philosophy and performance record. Since the managers have the authority to decide which securities to buy or sell for the client, as well as when to buy and sell them, they are considered to be a fiduciary. Under the law, fiduciaries must always place the best long-term interests of the client ahead of their personal interests or the interests of the firm.
Trading Department [Back to the Top]

The trading deparment is responsible for executing clients' securities orders. This department effects the actual purchases and sales of securities, in accordance with the clients' instructions. In addition, the trading department tries to buy and sell securities profitably with the firm's own money.
Operations [Back to the Top]

The operations department is responsible for processing all of the paperwork generated by the firm's other departments, most of it having to do with "clearing" the firm's trades. This department also handles all of the clients' bills and statements.
Compliance [Back to the Top]

This department is responsible for making sure that all other departments within the firm adhere to the various securities laws and regulations imposed on the industry by federal and state securities agencies.
Research [Back to the Top]

The research department explores investment opportunities to determine which are the most suitable and beneficial for clients and for the firm's own trading activities. The so-called full-service brokerage firms provide their clients with the firm's research at no additional cost. The cost of providing this research is built into the commisions that the clients pay when they buy and sell secrities. Another type of brokerage firm, called a discount firm, does not provide its clients with research. Instead, they charge reduced commision rates for executing orders and clearing trades.

Go back to the: The Securities Industry.

This page is created by Julia Lee '99 and is maintained by Professor Satyananda Gabriel of the Economics Department, Mount Holyoke College, January 1999.