Member Firm
A member firm refers to a brokerage or financial firm that has membership to a stock exchange or securities exchange. These firms are granted the rights and privileges to trade on the exchanges they belong to. Membership is typically granted to the professionals of the firm individually rather than the firm itself.
Key Takeaways:
– Member firms are companies that are members of a stock exchange.
– Membership allows professionals of the firm to execute trades on the trading floor of the exchange.
– Many securities exchanges are self-regulatory organizations made up of member firms.
– Today’s member firms are large financial institutions that act as market makers for clients or trade for their own portfolios.
How Member Firms Work:
The term member firm originally described firms that purchased seats on the New York Stock Exchange (NYSE). Over time, the term has expanded to include other exchanges worldwide. Broker-dealers and brokers become members of a specific exchange by completing forms and paying a fee. Applicants must meet regulatory standards to qualify.
Member firms perform market-making activities to provide liquidity and facilitate price discovery. They can carry out client orders or proprietary trading to generate a profit and maintain a securities inventory for other market participants. Additionally, member firms provide services like recommending opening prices for thinly-traded securities and reducing volatility during special situations such as IPOs or corporate actions.
Special Considerations:
Member firms are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA is an independent organization that writes and enforces rules for broker-dealers, capital acquisition brokers, and funding portals in the United States.
A member organization, member, or member firm is a company registered with FINRA according to Rule 2T. The NYSE distinguishes between regular market-makers and designated market-makers, with the latter having greater responsibilities and privileges. There are approximately 20 designated market-makers and 150 regular market-makers on the NYSE.
Real-World Example of a Member Firm:
Goldman Sachs (GS) is a well-known member of the NYSE. It operates as a lead market maker, also known as a specialist or designated market-maker (DMM). Founded in 1869, Goldman Sachs has been a member of the NYSE since 1896. The firm has been involved in numerous high-profile IPOs, including General Motors, Alibaba, and Facebook. In addition to market-making, Goldman Sachs is engaged in various financial activities such as investment banking, lending, private equity, and investment management. The firm also participates in proprietary trading, including high-frequency trading (HFT).
