What Are Brokers, Prime Brokers, and Prime of Prime?

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In the financial exchange market, direct access is often restricted to institutional investors such as hedge funds. This naturally raises the question for individual investors: How can one engage in asset trading? The answer lies in utilizing brokers.

However, it’s important to note that brokers come in various forms. How do these brokers function, and which firms offer the liquidity you need? This article aims to address these questions.

What Is Broker?

A broker meaning is to serve as an intermediary between an investor and various financial markets, such as forex, blockchain-based cryptocurrencies, equities, ETFs, and commodities. They facilitate and carry out transactions on behalf of other parties.

Since stock exchanges typically only entertain orders from their members, both individual and institutional investors rely on brokers for access to these markets. Brokers earn their compensation through a range of methods, including commissions, service fees, and other exchange-related remunerations.

Key Takeaways

  • Prime of Prime connects Tier 1 banks to smaller Prime Brokers.
  • Prime Brokers offer specialized services such as lending assets and providing higher leverage.
  • Retail Brokers are the brokers that individual traders commonly use.
  • Tier 1 Banks set the initial trading prices but are not accessible to retail traders.

How Does a Broker Work?

Given that the average investor can’t directly trade assets on the market, brokers step in to act as intermediaries. They take orders from investors and execute them in the marketplace. The prime broker is often the go-to source for trading prices.

Retail brokers obtain these prices, add a service fee known as the “spread,” and then present the final trading price on the exchange. Many brokers rely on prime brokers to serve as Liquidity Providers (LPs), ensuring asset liquidity.

It’s important to highlight that forex trading differs from stock or futures trading. In forex, brokers have the option to trade against their clients, a system known as the “B-Book,” typically used by “Dealing Desk” market makers.

On the other hand, “No Dealing Desk” ECN/STP brokers send all client transactions directly to the underlying market or to liquidity providers, a method referred to as the “A-Book.” Some forex brokers employ a hybrid approach, using the B-Book for losing investors and the A-Book for those who are profitable.

In regulated markets like futures and stocks, all transactions are funneled through an exchange that matches buyers and sellers based on price and time of arrival.

What Are the Different Types of Brokers?

There are four key types of brokers: stock, forex, full-service, and discount. Each serves as a middleman for investors but offers different services.

  • Stock Broker: Facilitates share buying and selling, essential for individual investors who can’t trade directly.
  • Forex Broker: Trades currencies for you, offers 24/7 market access, and charges fees like spreads.
  • Full-Service Broker: Provides comprehensive financial services, including advice and planning. Ideal for those short on time.
  • Discount Broker: Offers low-cost trades without advice. You manage your own portfolio.

What Is a Prime Brokerage (Prime Broker)?

A prime broker refers to a suite of services offered by major financial firms like Goldman Sachs and JPMorgan Chase, primarily to hedge funds and large investors. These services often include the ability to borrow securities or cash for the purpose of netting and generating profits. While it’s common for entities to engage multiple prime brokers, they are not obligated to conduct all their business through a single one.

How Does a Prime Broker Work?

Prime brokers mainly serve large investment entities like Forex brokers and hedge funds, which handle billions of dollars. When markets decline, these institutions may need to borrow significant sums to boost returns and short-sell stocks. Prime brokers step in during these challenging times, assisting in asset management and providing loans to increase leverage.

They also act as intermediaries between hedge funds and other parties. Known as Tier 2 liquidity providers, prime brokers open accounts with major banks to extend market access to retail brokers.

Services of the Prime Broker

  • Leverage: Prime brokers boost clients’ buying power by leveraging held assets. Core services include dark pool access and short-term loans.
  • Research: They offer specialized tools for comprehensive investment management and goal-setting.
  • Asset Lending: They lend financial assets, transferring ownership and charging a fee, often providing rebates for shorting stocks.
  • Custody: Quick trade execution is possible because they hold client assets, simplifying financial reporting.

Account Requirements for Prime Broker

The minimum account size required to open and use prime brokerage services is $500,000 in assets. This is because the great majority of prime broker clients are high-net-worth investors and institutions. Those who meet the qualifications are money managers, hedge funds, as well as a variety of other professional investors.

What Is Prime of Prime?

Prime of prime serves as a Tier 2 broker, linking retail brokers to the liquidity pools of major Tier 1 banks. Direct trading with these large banks isn’t possible, so Prime of Prime holds an account with a Tier 1 broker to enable client trading.

How Does a Prime of Prime Work?

Prime of Prime brokers act as intermediaries between retail brokers and Tier 1 banks, linking smaller retail orders with the larger orders of these major banks. Most Prime of Primes avoid direct dealings with retail brokers due to the risk-averse nature of Tier 1 banks, which demand strict financial and risk protocols.

Services of Prime of Prime

  • Enhanced Liquidity: Prime of Prime offers traders greater access to liquidity, a crucial advantage.
  • NDF Access: They provide entry to non-deliverable forwards (NDF), which traditional prime brokers usually don’t offer.
  • Higher Leverage: Prime of Prime allows for increased leverage, enabling smaller trades.
  • Data Feed: They supply a data feed compatible with multiple trading platforms.
  • Competitive Quotes: With multiple prime bank relationships, they offer retail brokers competitive, real-time quotes, fewer requotes, and a higher order fill rate.

Collaborative Working of Prime of Prime, Prime Broker, and Broker

The hierarchy of brokers—Prime of Prime, Prime Broker, and Retail Broker—systematically collaborate, prioritizing based on fund size. The origin of all trading prices is the Tier 1 (Interbank) market, which is the first to access asset prices. However, retail traders can’t directly access these prices.

Prime of Prime brokers bridge this gap by contracting with Tier 1 banks to obtain prices and serve as Liquidity Providers (LPs) for larger orders. They, in turn, pass these prices to smaller Prime Brokers.

So, where does this leave retail traders? Retail brokers form agreements with Prime Brokers to obtain prices and liquidity, which they then offer to retail traders. However, it’s essential to note that each transaction incurs costs, which are added to the trading price.


The brokerage landscape is a hierarchical system where each tier serves a specific role in providing access to market prices and liquidity. At the top, Tier 1 banks set the initial trading prices, which are then accessed by Prime of Prime brokers. These Prime of Primes serve as a bridge to smaller Prime Brokers, who in turn work with Retail Brokers.

Retail traders, who can’t directly access Tier 1 prices, rely on these Retail Brokers for their trading needs. Each level in this hierarchy has its own set of services, advantages, and costs, offering a range of options for traders of all sizes.


1. What is a broker?

A broker is a middleman who facilitates buying and selling in financial markets for clients.

2. What is prime of prime?

Prime of Prime is a broker that connects smaller Prime Brokers to larger Tier 1 banks, providing access to market prices and liquidity.

3. What is a prime brokerage (Prime broker)?

A Prime Broker offers specialized financial services like asset lending and higher leverage, usually to more substantial investment clients.

4. Why do I need a broker?

A broker provides the necessary infrastructure and services to execute trades, offering access to financial markets you might not have otherwise.

5. What is the difference between a trader and a broker?

A trader buys and sells financial assets for profit, while a broker facilitates these trades for the trader, often providing additional services like advice and market analysis.

Related Article:

Read more: Financial

By FinxpdX Team
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