Functions of Brokerage House: The business of brokers consists of searching out buyers when their customers wish to sell and locating sellers when their customers wish to buy so as to execute transactions as per customers’ instructions. Usually, deals are arranged with other brokers representing their customers. Functions of Brokerage House.
The brokers do not function as principals in the transactions; they are agents only. Brokers charge a commission on each purchase and sale which they execute which varies among brokerage houses.
It is important that the brokerage firm exercises care and demonstrates a reasonable amount of skill in fulfilling the customer’s order. The brokerage firm may be held liable for any losses resulting from its mistakes. The care with which the brokerage firm executes orders is determined by what is reasonable practice in their business.
The exercise of care and skill requires that the broker follows instructions and places the order in the market when the security is traded in the fastest possible time. The brokerage firm is also obligated to refrain from making secret profits on transactions or from crossing orders in its office by acting as both broker and dealer in the same transaction.
All securities listed on an exchange ought to be traded on the floor of that exchange. They cannot be extended off the floor by the broker. The brokerage firm cannot act as both broker and dealer in the same transaction because there could be a conflict of interest or a double commission might result. If the securities are not listed on an exchange but traded in the over-the-counter market, the broker might own the shares himself.
He would be acting as a principal or dealer in the transaction. Many brokerage firms specialize in making a market in certain securities. Here the brokerage firm would sell the security to the customer at the asking price and would not charge a commission for handling the transaction.
The broker makes his fee from the difference between the price at which he buys the shares for his own account and the price at which he sells them to customers. The difference between the asked price and bid price by the brokerage firm is known as the spread and is the compensation for making a market in that security.