Two-Dollar Broker What It Is How It Works

Two-Dollar Broker What It Is How It Works

Two-Dollar Broker: What It Is, How It Works

David has extensive experience in financial and legal research and publishing. Since 2020, as a Dotdash fact checker, he has validated over 1,100 articles on various financial and investment topics.

What Is a Two-Dollar Broker?

A two-dollar broker is an outdated term for a member of the New York Stock Exchange (NYSE) who executes trades and orders for another broker’s client. Brokers may hire two-dollar brokers when they are too busy to handle the work themselves.

A two-dollar broker may also execute orders for a broker who is not a member of the exchange floor, although some brokers have both a presence on the trading floor and a two-dollar broker who can handle orders simultaneously.

Key Takeaways

  • A two-dollar broker refers to a floor broker member of the NYSE or another exchange.
  • They primarily work on orders given to them by other brokers for the benefit of that broker’s client.
  • They are utilized when the primary broker is overwhelmed or not a member of the exchange where the order is placed.

Understanding a Two-Dollar Broker

The term "two-dollar broker" came about because historically, these brokers were paid $2.00 for a round lot trade of 100 shares. However, the actual commission they received varied. Therefore, a two-dollar broker could earn more or less than $2.00 per trade. Despite this, the name two-dollar broker has persisted even though it no longer accurately reflects the broker’s payment.

READ MORE  Richmond Manufacturing Index What It is How It Works

The term is outdated as electronic trading and online exchanges have largely replaced floor trading. Additionally, most online brokers today are members of all relevant exchanges or have proxies that are, making their needs less apparent. Moreover, zero-commission trading has become more common, rendering a $2.00 trade quite costly.

How a Two-Dollar Broker Was Paid

Unlike commissioned brokers who work for specific firms, two-dollar brokers typically functioned as independent contractors and acted as agents for other brokerages. They were essentially freelance brokers and agents.

Two-dollar brokers were often compensated based on a flat-rate fee or a percentage-based commission. Their payment came from the broker they worked for. When a client made a trade with their main broker, the two-dollar broker would execute the trade upon the first broker’s request. While the client paid their own broker a commission, the two-dollar broker would receive a portion of that commission from the first broker. Consequently, a two-dollar broker was considered a third-party or pass-through broker.

Due to increased competition, technological advancements, and more payment options, floor brokerage commission structures have significantly changed. As a result, most brokers no longer receive flat fees for their services. Instead, receiving a commission for trades is more profitable.

Leave a Reply

Your email address will not be published. Required fields are marked *