London Stock Exchange stockbrokers can act as either:
(i) agents who deal on behalf of their clients (the most likely occurence)
(ii) principals who act on their own behalf with the expectation of making profits.
There are currently over 250 member firms of the London Stock Exchange of which around 200 act only as stockbroker / dealer agents.
This
means that to you and I, a stockbroker is a middleman (or woman!) who
helps us to buy and sell our shares. The market maker does not deal with
the general public - they only deal with brokers. In it's way, this
slightly antequated system is similar to the legal profession in England
- a barrister only deals with a solicitor and the solicitor deals with
the public.
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Since 1986 it has been possible for a stock broker to also be a market
maker. This ability to act as both broker and market maker is known as dual capacity. It was not allowed before 1986 because of potential conflict of interest issues.
Stock brokers use the traditional method of buying and selling by using a quote-driven system called SEAQ and dealing with the general public (usually by phone).
When using a stockbroker, it is important to remember that a part of their income is generated by the "bid / offer spread" which is the market difference between purchase and sale price. An easy way to remember which part of the trade is which is an old phrase - bid to get rid. Therefore, offer is to buy and bid is to sell.
There is, of course, usually a flat fee and for larger trades a percentage commission as well. It is also worth pointing out that most markets - or at least their governments - charge some form of stamp duty or purchase tax which is to be paid on a trade.
Nice Work If You Can Get It
It used to be, before the internet, that being a stockbroker was a path to a very secure and well paid career, with long boozy lunches and 'client entertainment' at the best sporting events of the year. Most brokerages regional and served a local area so that they could meet with clients.
Unfortunately for brokers, the internet broke the hold over information that they used to have. With most information appearing in the following morning's paper, a stockbroker had up-to-the-minute information that made him or her more adept in the stock market than most private investors could be.
In those days, many people bought and sold holdings by post! The idea or writing a letter to make a purchase seems so antequated to us now, but making a trade by telephone was a big deal.
Now of course, markets move more quickly, news impacts prices within seconds and information is available for free online to everyone. The hold of the stockbroker has been broken and with it has gone the long, secure career with a good wage and lots of perks.
The Expenses Are Gone
It is not easy to take a client to lunch when they make their trades online and no longer regionally located.
In
fact, the internet has revolutionised the industry. It is now possible
to have all members of staff in one building - effectively a call
centre. With the introduction of 'execution only trades' there is little
to no requirement for market 'colour' or knowledge. In fact, for the
majority of private investors, their broker is little more than an order
taker.
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This has enabled national brokerages to sell their property portfolios,
lower the number of staff they employ and still serve more clients at a
lower cost. The business is now highly price competitive since most
companies have turned themselves into providers of a commodity (buying
and selling) and leave the value added (advice and managing portfolios)
to specialist 'wealth management' companies.
Man In The Middle
Market makers are effectively traders who wish to make a two-way market (buy and sell) in certain specified shares. These shares must be nominated in advance to the London Stock Exchange.
Generally, the more liquid a company is and the larger it's value, the more market makers will be willing to trade it. Quotes must be maintained for all shares in which they make a market between 8am and 4.30pm Monday to Friday.
When using the SEAQ system, here is what will happen ...
You decide to buy or sell shares and so call your broker on the phone.
Your broker will have on his desk a quotation system. He or she will
input the details of the trade you wish to carry out into his system and
be left with two options.
The broker will either be able to trade online for you through a market
maker, or will need to call a market maker to execute the trade. Either
way, it should take just a few seconds to complete.
It is this two step approach that forces your stock broker to inform you about 'indicative prices' as he checks your willingness to proceed before contacting a London Stock Exchange market maker.
Historically, a stockbroker would deal with clients (marketing, customer service and the management of funds) but would be located around the country, near to clients, usually in large cities. This meant that they were not actually present on the trading floor of the stock market themselves. The market maker would be present at the London Stock Exchange and so would fulfill trades.
Needless to say, in a modern information society which is interconnected as never before, the role of a market maker has changed and been reduced.
There are also 16 companies that approved by the Financial Services Authority to be gilt-edged market makers (GEMMs). This status allows them to offer a market in gilts (government bonds).
To read more about the workings of the LSE and FTSE, please visit:
Learn More About The London Stock Exchange
London Stock Exchange Information
London Stock Exchange History
Alternative Investment Market
London Stock Exchange Liquidity
London Stock Exchange Listing Rules
London Stock Exchange Stockbroker Charges
London Stock Exchange SETS