Contract brokers are members of a stock exchange that choose to execute orders for transactions on behalf of another investor who is also a member of the same exchange. An investor may choose to function as a contract broker for several different reasons. In general, the transactions initiated by the contract broker will be routed through the brokerage that the member usually utilizes, rather than the brokerage firm used by the other stock exchange member.
One of the more common reasons why a member would choose to facilitate transactions as a contract broker is good old-fashioned time management. Both members wish to engage in the same investment activity associated with a given stock or security. Rather than both members choosing to initiate separate orders, one member receives authorization from the other and places both orders with a brokerage house. Using this approach, both investors have the opportunity to engage in trading according to their wishes, but only one member had to do the legwork.
As the designation implies, a contract broker enters into an agreement with other members of the exchange in order to execute trades on their behalves. The exact terms and conditions that are included within the contract or agreement will vary from one situation to another. In each case, the terms and conditions must be in accordance with current laws regulating financial transactions with the jurisdiction of record. That means any individual who functions as a contract broker in the United States is subject to laws and regulations regarding trading activity that has been set by the Securities and Exchange Commission.
The relationship between a contract broker and other members of the exchange may be short term or long term. In some instances, the united effort of the broker and the member investors may be aimed at a specific project and for a specified period of time. In other cases, the agreement between the contract broker and the individual member investor may broad and intended to provide authorization for a wide range of trades over an extended period of time. In both cases, there are generally escape clauses that each party may invoke if necessary.