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So in the past, before they had computers, I imagined brokerage was the fee given to a stock broker to give you advice on what stocks to buy, or to ring up and make a trade for you.

But now everything is automated and on the internet so what is it you get when you pay brokerage? In essence I'm asking what are the activities that a brokerage firm actually do.

I can think of stuff like build a website so you can buy and sell the stock, communicating with the stock exchange to buy and sell etc.

I imagine (and I could be wrong) the stock exchange would be kind of just like this massive database sitting somewhere , and brokerage firms would have software to access this database in order to buy and sell stock. Maybe to access the stock exchange, there would be some sort of access fee?

So in theory, would it be possible to build your own software to buy your own stock?

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  • One quick comment: If the book "The four pillars of investing" is anything to go by, you should never ever think that your stock broker knows what they're talking about when they recommend stocks. That's because, as the author alleges, these guys are sales people, not people particularly knowledgeable in stocks, funds, bonds etc.
    – Lagerbaer
    Commented Nov 2, 2012 at 2:09
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    You have to be a member of a stock exchange in order to buy and sell stocks on the stock exchange. Membership fees are considerable (i.e. not affordable by 99% of the country or, I suspect, 99% of the readership of money.SE), and so while you can build your own software to buy stock, the stock exchange software will not talk to your software if you are not a member.
    – Dilip Sarwate
    Commented Nov 2, 2012 at 2:54
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    You need a brokerage license to be a broker on a specific stock exchange. Even investment companies like BlackRock use other investment banks as their brokers. So something to ponder on.
    – DumbCoder
    Commented Nov 2, 2012 at 8:36

2 Answers 2

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Off the top of my head, a broker:

  • provides a name in the market (by that I mean your counterparty does not have to assess your individual counterparty risk, but only that of the broker's)
  • clears and settles the trades (1 trade could have quite a number of counterparties)
  • may give you quotes or any other form of insight into the books
  • may provide you a margin account
  • may provide you means to borrow securities

While there are stock exchanges that offer direct market access (DMA), they (nearly) always want a broker as well to back the first two points I made. In that case the broker merely routes your orders directly to the exchange and acts as a custodian, but of course the details heavily depend on the exchange you're talking about.

This might give you some insight: Direct Market Access - London Stock Exchange

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You can get direct market access (DMA) but you have to pay for data, as this is part of the exchanges data plan, and there are plenty of other fees that are passed straight down to you.

Your clearing firm also has fees that are passed on to you.

In general you are looking at $150 a month on the low side, in data and software fees.

If you wanted pure access, NASDAQ alone charges $6,000 a month last I checked.

The different routes data routes to the exchange all have different rules, and they give you rebates for some kinds of orders in some conditions.

Brokers nowadays usually assume this responsibility (including collecting the rebates lol), at the very least, and charge an average price for routing your orders, a price that fits into their business plan and their target audience.

Hope that helps.

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