Prime brokerage accounts use one central broker (the prime broker) as the client’s main point of contact, even though many other brokers may actually execute the trades. The prime broker is always a financial firm, and the client is usually a hedge fund. In addition to managing the relationship, the prime broker holds custody of the client’s assets and handles all recordkeeping.
When the client wants to trade, it can route transactions through different executing brokers. Hedge funds often prefer specific firms for specific types of trades. For example, a hedge fund might use TD Ameritrade for stock trades, Fidelity for bond trades, and Charles Schwab for options trades.
Even if multiple brokers execute trades, the assets and records stay centralized at the prime broker. From the client’s perspective, there’s one primary firm to work with, while trade execution can occur across several firms. Clients may also pay less margin interest by consolidating margin borrowing at one firm, since larger loans often qualify for lower margin rates.
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