Also known as a clearing member, a member firm is a brokerage that has at least one officer who holds membership in a major stock exchange, such as the New York Stock Exchange (NYSE). This status is also granted to any brokerage or dealer in which one of the officers of the firm is a member of a clearing house or some other type of business that conducts business on an exchange and is classed as self-regulatory. Typically, a member firm has broader trading powers on the exchange floor than other agents, 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 is extended to officers of the firm who do not have a direct membership in a major stock exchange, but have a connection through the courtesy of another officer who does hold membership in the exchange. Allied members also enjoy a range of benefits that are associated with this designation, including the opportunity to manage certain types of transactions on behalf of clients as well as the firm. The exact scope of authorization provided to an allied member depends on the guidelines and regulations put in place by the exchange in question.
Becoming a member firm requires a significant level of commitment to the exchange. Typically, it is necessary to purchase what is called a seat on the exchange floor. The cost of the purchase will vary from one exchange to the next, generally requiring an amount that in excess of $1 million US dollars. For larger firms, this cost is usually offset by the ability to conduct trades on the floor in real time, which in turn increases the commissions and fees charged to clients.
The officer of a member firm who holds that seat at the exchange will often use the privileges to execute orders for clients, but also has the ability to utilize that presence as a means of executing orders for his or her individual investment account. Most exchanges place some limits on trading for a personal account, which in turn helps to minimize the potential for insider trading to occur. As long as the trades are conducted in compliance with current governmental trade regulations and the standards of the exchange, the officer of the member firm may execute orders for both clients and for his or her own personal investment portfolio.
