Custodian vs Prime Broker: What’s the Differences?

In today’s electronically connected world, trading orders can be executed in seconds. However, there are some complex processes going on behind the scenes that involve both core brokerage and custody-related functions. A single broker may provide both functions, or two completely separate institutions may be involved. Here we’ll discuss the differences between a Custodian vs Prime Broker.

What Is The Custodian vs Prime Broker

Custodian (Custody Provider)

Custodians, also known as custody providers, will hold the assets, according to Pilotage. A custodian can be thought of as a vault that the prime broker can access only with their explicit consent. In the days when stock certificates were printed on paper, they were actually kept by a custodian. Today, most of the “storage” is done electronically. Still, financial institutions must manage the flow of money between buyers and sellers. When you sell shares, the custodian transfers the electronic record representing the share certificate to the buyer’s account and collects the money from the seller on your behalf.

Prime Brokerage

According to the Hedge Fund Marketing Association, a prime broker is an entity you interact with when you pick up the phone or log on to an internet site to place a trade order. A prime broker and a clearing broker are generally one and the same as the prime broker is responsible for clearing trades (vs. custody).

Similarly, it is the prime broker who arranges the loans that can be used for leveraged trading. Prime Brokerages prepares and reports your trading activity to tax authorities, files tax returns at the end of the year, and maintains records for use in the event of a dispute. Most prime brokers also offer investment advice. Note that the terms prime brokerage and brokerage can be used interchangeably.

What are The Differences Between Custodian vs Prime Broker

Custodian vs Prime Brokerage, along with clearinghouses, is the most important trade intermediary in the trading cycle. Brokers initiate trades and clearinghouses settle them, while custodians provide access to and control over client funds used in trades. Brokerage services may be integrated with custody and transaction processing, and such transaction integration may create conflicts of interest. Some of the differences between custodian vs prime broker:

Security and Trust

Setting up a prime broker requires much less investment than setting up a custodian. A prime broker may have only a few employees to answer the phone or a limited number of employees to track the paperwork. However, investors may find it difficult to trust such a small company when it comes to the custody of their assets. A recognized entity. Custodians are closely monitored by federal and local authorities to prevent fraud, error, and bankruptcy.

Integrated, Full-Service Brokers

Brokers can also offer both prime brokerage and custody services. Such companies generally do not have to pay outsiders for custody functions, so their cost per transaction is lower and investment We offer competitive commission rates for homes.

To recoup the high costs involved in building a custody infrastructure, we also typically offer custody services to multiple prime brokers. Due to their high costs and consequent high commission rates, prime brokers tend to target select, wealthy customers. These brokers often differentiate themselves by giving each client personal attention.

Conflict of Interest

Without the checks and balances provided by third-party custodians, prime brokers who provide both brokerage services and asset custody have no conflict of interest between pursuing their client’s interests and pursuing their own. may occur. The main concern customers of such prime brokers should have is how their money is protected.

Reassuring clients that the broker is not misusing their wealth for their accounts, For this reason, prime brokers provide custody services through a separate legal entity of the broker’s subsidiary, thereby providing expedited trading services and reducing conflicts of interest.

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