What Is a Brokerage House? Definition and How It Works

A brokerage house is a financial institution that facilitates the buying and selling of securities like stocks, bonds, and mutual funds. These firms act as intermediaries between investors and the market, providing access to exchanges where trades occur. Choosing the right brokerage impacts investment costs, available services, and the overall trading experience.

Role in Facilitating Trades

Brokerage houses execute buy and sell orders on behalf of investors, routing them through stock exchanges, electronic communication networks (ECNs), or internal systems. Execution speed and price vary depending on the method used. Some brokerages employ high-frequency trading algorithms to optimize trade execution.

Market liquidity affects how efficiently trades are completed. Brokerages with strong relationships across multiple exchanges can provide better liquidity access, reducing price slippage. Highly liquid stocks like Apple (AAPL) or Microsoft (MSFT) typically see orders filled quickly at expected prices, whereas thinly traded securities may have wider bid-ask spreads, making execution less predictable.

Order types influence trade execution. Market orders are filled immediately at the best available price, while limit orders allow investors to specify a price for buying or selling. Stop-loss and stop-limit orders help manage risk by triggering trades at predetermined prices. Some brokerages offer smart order routing, scanning multiple venues to secure the best possible execution.

Commission and Fee Structures

Brokerage houses earn revenue through commissions, fees, and other charges. While many firms have eliminated commissions on stocks and ETFs, costs still apply for options, mutual funds, and margin accounts. Understanding pricing structures is crucial when selecting a brokerage.

Options trading usually incurs per-contract fees, often around $0.65 per contract, though some firms offer discounts for high-volume traders. Mutual funds may carry transaction fees unless they are part of a broker’s no-transaction-fee (NTF) program. Margin accounts, which allow investors to borrow funds to trade, come with interest charges that vary by brokerage and borrowing level. As of 2024, margin rates range from 5% to over 12%.

Beyond trading costs, investors should be aware of account maintenance fees, inactivity fees, and transfer charges. Some brokerages impose annual maintenance fees on retirement accounts, typically between $25 and $75. Inactivity fees, though less common, may still apply at certain firms. Transferring assets to another brokerage can trigger an ACATS fee, usually between $50 and $100.

Types of Brokerage Houses

Brokerage firms vary in service levels, pricing, and tools, catering to different investor needs.

Full-Service Brokerage

These firms provide investment advice, portfolio management, retirement planning, and tax strategies. Clients work with financial advisors who tailor recommendations based on financial goals, risk tolerance, and time horizon. Major full-service brokerages include Morgan Stanley, Merrill Lynch, and UBS.

The cost of these services is higher than other brokerage types. Many full-service firms charge a percentage of assets under management (AUM), typically 1% to 2% annually. For example, an investor with a $500,000 portfolio might pay $5,000 to $10,000 per year in advisory fees. Some firms also use commission-based pricing, where advisors earn a percentage of each trade. While this model provides guidance, investors should be aware of potential conflicts of interest, as advisors may have incentives to recommend products that generate higher commissions.

Discount Brokerage

These brokerages offer lower-cost trading services without personalized financial advice. Investors manage their own portfolios, making decisions on stock purchases, asset allocation, and risk management. Well-known discount brokers include Fidelity, Charles Schwab, and TD Ameritrade.

The main advantage is cost savings. Many discount brokers have eliminated commissions on stock and ETF trades, reducing transaction expenses. However, fees may still apply for options trading, mutual fund transactions, and margin borrowing. Fidelity charges $0.65 per options contract, while Schwab imposes a $49.95 fee for purchasing certain mutual funds outside its no-transaction-fee list. Investors using discount brokerages should be comfortable conducting their own research, as these platforms provide limited advisory support. Some firms offer robo-advisors, which use algorithms to manage portfolios for a lower fee, typically around 0.25% of AUM annually.

Online Platforms

These brokerages focus on technology-driven trading, offering web-based and mobile applications with real-time market data, advanced charting tools, and algorithmic trading capabilities. Popular online platforms include Robinhood, ETRADE, and Interactive Brokers.

Many online brokerages appeal to active traders by providing commission-free trades, fractional share investing, and extended trading hours. Some platforms also support cryptocurrency trading, options strategies, and futures contracts. Interactive Brokers, for instance, offers tiered pricing for high-volume traders, with stock commissions as low as $0.005 per share. While these platforms provide accessibility and low costs, they may lack the customer support and in-depth research tools available at full-service firms. Investors should also be mindful of potential risks, such as order execution delays and margin call requirements, which can lead to unexpected losses.

Regulatory Oversight

Brokerage houses operate within a regulatory framework designed to protect investors and ensure market integrity. In the United States, the Securities and Exchange Commission (SEC) oversees brokerage firms, enforcing compliance with laws like the Securities Exchange Act of 1934. This legislation mandates that brokerages maintain accurate financial records, disclose conflicts of interest, and adhere to anti-fraud provisions. Firms must also comply with Regulation Best Interest (Reg BI), which requires brokers to act in the best interests of retail customers when recommending securities or investment strategies. Violations can result in penalties, suspensions, or revocation of a firm’s registration.

The Financial Industry Regulatory Authority (FINRA) also regulates broker conduct, licenses financial professionals, and arbitrates disputes between investors and firms. Brokerages must submit to routine examinations and audits to ensure compliance with capital adequacy requirements, trade reporting standards, and anti-money laundering (AML) protocols. Failing to meet these obligations can lead to fines, as seen in past enforcement actions against firms that failed to monitor suspicious transactions.

Account Requirements

Opening a brokerage account requires investors to provide personal information, including Social Security numbers, employment details, and financial background, to comply with regulatory standards. Brokerages also assess an applicant’s investment experience and risk tolerance to determine suitability for certain products, such as options or margin trading. Some firms impose minimum deposit requirements, particularly for margin accounts, where investors must maintain a minimum balance—often $2,000—to comply with Federal Reserve Regulation T.

Beyond initial funding, brokerages may require investors to meet ongoing maintenance standards. Margin accounts, for example, are subject to minimum equity requirements under FINRA Rule 4210, which mandates that investors maintain at least 25% of the total market value of securities in their account. Falling below this threshold triggers a margin call, requiring additional funds or the liquidation of assets. Certain brokerages also impose higher minimums for premium services, such as access to dedicated financial advisors or advanced trading platforms, which may require balances of $100,000 or more.