Prime brokers provide an all-in-one trading and investing account for institutional traders and hedge funds. In this guide to prime brokers we will explain what a prime broker does, who they do it for and which type of prime broker is more appropriate for specific types of client.
What does a prime broker do?
Prime brokers provide trading and investing services to professional and institutional clients. Prime brokerage clients’ are split by size and asset class. But, the largest prime brokers in the world only accept very large clients so smaller and start-up hedge funds, brokers and traders must use a specific type of prime broker more appropriate to their trading.
The purpose of a prime broker is to act as the consolidated portfolio, risk and services account for a hedge fund. Their primary purpose is to allow hedge funds or large investment clients the ability to borrow securities or cash to trade and invest in order to achieve absolute returns.
Often hedge funds trade with many different brokers throughout the day who will then “give up” trades to the price broker where the bulk of a fund’s assets are held. Whilst the prime broker may handle the majority of a hedge fund’s execution it is normal for funds to spread business across multiple brokerage accounts to ensure that trades are executed with discretion and finesse.
Prime brokers also offer access to their client pool for capital introduction to increase the net asset value of hedge funds. This is also common with competing brokers who will want to add value to win execution business to generate commission.
Do you need a prime broker?
If you are running other people’s money through a family office, hedge fund of financial institution you will need a prime broker rather than a standard brokerage account.
A prime broker is geared toward large, sophisticated institutional clients—such as hedge funds and asset managers—whereas a “normal” or retail broker typically serves individual investors and smaller institutions.
A prime broker work primarily with institutional clients who trade in large volumes and require a broad suite of integrated services whereas a normal broker caters to retail investors or smaller institutions, offering more standardized trading services.
You won’t get the same range of services you need with a normal broker as a prime broker offers an extensive array of services including securities lending, margin financing, consolidated clearing and settlement, custody, and risk management. They often provide bespoke, technology-driven platforms that integrate trading, financing, and reporting.
You’ll also need a prime broker if you have operational complexity & difficult relationships
prime brokers make it wasier to have more complex relationship with clients, often acting as a central hub that connects clients to various trading platforms, liquidity providers, and additional financial services. This relationship usually requires higher minimum capital commitments.
If you are trying to trade for “non-traditional” clients a normal broker will probably just say no, as they provide a simpler, more transactional relationship focused on buying and selling securities without the layered support services found in prime brokerage.
- If you are looking for a prime broker you can use our prime brokerage account finder to get connected to the most relevant people.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
You can contact Richard at richard@goodmoneyguide.com
