How does a brokerage firm work?
"Brokerages offer you the convenience of buying and selling financial products. They are usually not exchanges themselves, but they can be. Typically there is an exchange and the broker sends orders to that exchange. The main benefit that brokers offer is a simpler commission structure. Not all brokers have their own liquidity, but brokers can have their own allotment of shares of a stock, for example, that they will sell you when you make an order, so that you get what you want faster. Regarding accounts at the exchanges to track actual ownership and transfer of assets, it is not safe to assume thats how that works. There are a lot of shortcomings in how the actual exchange works, since the settlement time is 1 - 3 business days, depending on the product (so upwards of 5 to 6 actual days). In a fast market, the asset can change hands many many times making the accounting completely incorrect for extended time periods. Better to not worry about that part, but if you'd like to read more about how that is regulated look up ""Failure To Deliver"" regulations on short selling to get a better understanding of market microstructure. It is a very antiquated system." The brokerage executes the transactions you tell them to make on your behalf. Other than acting as your agent for those, and maintaining your account, and charging a fee for the service, they have no involvement -- they do not attempt to predict optimal anything, or hold any assets themselves. "Real target of commisions is providing ""risk shelter"". It is kind of ""insurance"", which is actually last step for external risks to delete all your money. In part it cuts some of risks which you provide, brokers track history of all your actions for you (nobody else does). When brokerage firm fails, all your money is zero. It depends from case to case if whole account goes zero, but I wouldn't count on that."
They will make money from brokerage as usual and also from the interest they charge you for lending you the money for you to buy your shares on margin. In other words you will be paying interest on the $30,000 you borrowed from your broker. Also, as per Chris's comment, if you are shorting securities through your margin account, your broker would charge you a fee for lending you the securities to short. "Private equity firms have a unique structure: The general partners (GP's) of the firm create funds and manage the investments of those funds.  Limited partners (LP's) contribute the capital to the funds, pay fees to the GP's, and then make money when the funds' assets grow. I believe the article is saying that ultra high net worth individuals participate in the real estate market by hiring someone to act as a general partner and manage the real estate assets.  They and their friends contribute the cash and get shares in the resulting fund. Usually this GP/LP structure is used when the funds purchase or invest in private companies, which is why it is referred to as ""private equity structure,"" but the same structure can be used to purchase and manage pools of real estate or any other investment asset." "The basic way that these ""work"" is this: Every year I have to deposit 3500 to remain active in the company, else my account gets expired. You are paying money into the system. The only way you make any money is to: By my calculation I(or my child nodes) have to get 18 people to join to break-even my investment. Intuitively this should tell you that: What normally happens in this sort of thing is that people get conned/excited/tricked/whatever and sign a few of their friends up, but then quickly run out of people to bother/annoy/hassle/harass into joining and then they lose money on the whole thing." For the lenders to sell their positions they need buyers on the other side. For a large brokerage that means they should always be able to find another lender. For many contracts the client may have no idea they are a lender as lending is part of their agreement with the broker Investopedia has a section in their article about currency trading that states: The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread. Principals-only means that the only parties to a transaction are agents who actively bear risk by taking one side of the transaction.  There are forex brokers who charge what's called a commission, based on the spread. Investopedia has another article about the commission structure in the forex market that states: There are three forms of commission used by brokers in forex. Some firms offer a fixed spread, others offer a variable spread and still others charge a commission based on a percentage of the spread.  So yes, there are forex brokers who charge a commission, but this paragraph is saying mostly the same thing as the first paragraph. The brokers make their money through the bid-ask spread; how they do so varies, and sometimes they call this charge a commission, sometimes they don't. All of the information above differs from the stock markets, however, in which  The broker takes the order to an exchange and attempts to execute it as per the customer's instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument. The broker isn't taking a side in the trade, so he's not making money on the spread. He's performing the service of taking the order to an exchange an attempting to execute it, and for that, he charges a commission. "I'm posting this because I think I can do a better job of explaining and detailing everything from start to stop. :) A ""broker"" is just someone who connect buyers and sellers - a middleman of sorts who is easy to deal with. There are many kinds of brokers; the ones you'll most commonly hear about these days are ""mortgage broker"" (for arranging home loans) and ""stockbroker"". The stockbroker helps you buy and sell stock. The stockbroker has a connection to one or more stock exchanges (e.g. Nasdaq, NYSE) and will submit your orders to them in order to fulfill it. This way Nasdaq and NYSE don't have to be in the business of managing millions of customer accounts (and submitting tax information about those accounts to the government and what-not) - they just manage relationships with brokerages, which is much easier for them. To invest in a stock, you will need to: In this day and age, most brokers that you care about will be easily accessed via the Internet, the applications will be available on the Internet, and the trading interface will be over the Internet. There may also be paper and/or telephone interfaces to the brokerage, but the Internet interface will work better. Be aware that post-IPO social media stock is risky; don't invest any money if you're not prepared for the possibility of losing every penny of it. Also, don't forget that a variety of alternative things exist that you can buy from a broker, such as an S&P 500 index fund or exchange-traded corporate bond fund; these will earn you some reward over time with significantly less risk. If you do not already have similar holdings through a retirement plan, you should consider purchasing some of these sooner or later." You or the broker place an order to buy the share with the stock exchange. There has to be a matching sell order by someone.  Once a match is made, you pay the money and get the share. "Yes there are huge number of parts in the chain. Entire careers can be made out of handling clearing and settlement (back office) work for banks, exchanges, and trading houses. Even more so in the old days when this had to be done by hand, but obviously now everything is electronic. I can provide some insight into your questions, at least on the trading side.  Brokers in many cases have their own brokers or their own trading operations. They will have their own order entry and risk control systems, so that is all proprietary, but it usually doesn't involve more than send buy/sell Y shares of name X to venue Z at price P with extra instructions A,B,C,D,E. Eventually an order will make its way to a direct market participant who sends an electronic order directly to an exchange.  Note that when you say market, you should be referring to such ""exchanges"". In the US these are the NYSE, NASDAQ, and so on. When you are talking about futures there is the CME, CBOT, and so on. In Europe there is the EUREX and so on. The ""market"" refers to all these exchanges together which all have their own order mechanisms and matching engines. In many cases exchanges will route orders to other exchanges depending on the specific country's trading rules. Exchanges compete with each other by fee and liquidity offerings, which are shouldered directly by market participants.  Another detail is that each market participant has its own clearing firm, which has prior credit lines established with the market participant and a central clearing house. Like you said as soon as an order is matched, the exchange where the order takes place hands the trade over to the clearing house where the trade is then settled between the clearing firms representing either side of the trade. Clearing disputes happen at this step." High frequency trades are intra day. The would buy a stock for 100 and sell for 100.10 multiple times. So If you start with 100 in your broker account, you buy something [it takes 2-3 days to settle], you sell for 100.10 [it takes 2-3 days to settle]. You again buy something for 100. It is the net value of both buys and sells that you need to look at. Trading on Margin Accounts. Most brokers offer Margin Accounts. The exact leverage ratios varies. What this means is that if you start with 10 [or 15 or 25] in your broker you can buy stock of 100. Of course legally you wont own the stock unless you pay the broker balance, etc. "This is a technical term referring to the ""double entry""-styled book keeping of trades by brokers. Suppose a client executes a buy order with their broker.  The broker's accounting for this ""trade"" will be recorded as two different ""deals"" : One ""deal"" showing the client as buyer and the broker as seller, and a second ""deal"" showing the broker as buyer and the clearing house as seller.  The net result of these two deals is that the broker has no net position while the client has a net buy and the clearing house has a net sell with respect to this broker's account as accounted for internally by the broker. (And the same methods apply for a client sell order.) The client/broker ""deal"" record - i.e., the client side of the trade - is called the ""client side booking"", while the broker/clearing house ""deal"" record is called the ""street side booking""." "Oftentimes, the lender (the owner of the security) is not explicitly involved in the lending transaction. Let's say the broker is holding a long-term position of 1MM shares from Client A. It is common for Client A's agreement with Broker A to include a clause that allows the broker to lend out the 1MM shares for its own profit (""rehypothecation""). Client A may be compensated for this in some form (e.g. baked into their financing rates), but they do not receive any compensation that is directly tied to lending activities. You also have securities lending agents that lend securities for an explicit fee. For example, the borrower's broker may not have sufficient inventory, in which case they would need to find a third-party lending agent. This happens both on-demand as well as for a fixed-terms (typically a large basket of securities). SLB (securities lending and borrowing) is a business in its own right.  I'm not sure I follow your follow-up question but oftentimes there is no restriction that prevents the broker from lending out shares ""for a very short time"". Unless there is a transaction-based fee though, the number of times you lend shares does not affect ""pocketing the interest"" since interest accrues as a function of time." There are two terms that are related, but separate here: Broker and Market Maker.  The former is who goes and finds a buyer/seller to buy/sell shares from/to you.   The latter (Market Maker) is a company which will agree to partner with you to complete the sale at a set price (typically the market price, often by definition as the market maker often is the one who determines the market price in a relatively low volumne listing).  A market maker will have as you say a 'pool' of relatively common stock (and even relatively uncommon, up to a point) for this purpose. A broker can be a market maker (or work for one), also, in which case he would sell you directly the shares from the market maker reservoir.  This may be a bad idea for you - the broker (while obligated to act in your interest, in theory) may push you towards stocks that the brokerage acts as a market maker for. "The answer posted by Kirill Fuchs is incorrect according to my series 65 text book and practice question answers. The everyday investor buys at the ask and sells at the bid but the market maker does the opposite. THE MARKET MAKER ""BUYS AT THE BID AND SELLS AT THE ASK"", he makes a profit form the spread. I have posted a quiz question and the answer created by the Financial Industry Regulatory Authority (FINRA). To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker. The response is ""bid 15, ask 15.25."" If the order is placed, the market maker must sell: A)   800 shares at $15.25 per share. B)   800 shares at $15 per share. C)   100 shares at $15.25 per share. D)   800 shares at no more than $15 per share. Your answer, sell 800 shares at $15.25 per share., was correct!. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share." Unless you are a client with boatloads of money, I don't think service like you are asking about is very common. And I kind of assume that if you did have the boatloads of money, you would already have had such a relationship with a brokerage or accountant or similar financial professional. When I have taken money from brokerage accounts, I have had to call them to ask for it or requested it online. For both, the only option was to receive a check in the mail made out to the account holder (me). This usually takes about a week, although that does include waiting for the funds to settle after a stock sale which itself is about 3 business days. I know a lot of brokerages do have banks affiliated with them and one of the benefits of having a bank account with that affiliated bank is quicker transfers in and out of your bank account. But if you aren't willing to do that, I don't think you have many other choices other than receive a check in the mail. In some senses, any answer to this question is going to be opinion based - nobody outside of HFT firms really know what they do, as they tend to be highly secretive due to the competitive nature of the activity they're engaged in. What's more, people working at HFT firms are bound by confidentiality agreements, so even those in the industry have no idea how other firms operate. And finally, there tend to be very, very few people at each firm who have any kind of overall picture of how things work. The hardware and software that is used to implement HFT is 'modular', and a developer will work on a single component, having no idea how it fits into a bigger machine (a programmer, for instance, might right routines to perform a function for variable 'k', but have absolutely no idea for what 'k' stands!) Keeping this in mind and returning to the question . . . The one thing that is well known about HFT is that it is done at incredibly high speeds, making very small profits many thousands of times per day. Activities are typically associated with market making and 'scalping' which profits from or within the bid-ask spread. Where does all this leave us? At worst, the average investor might get clipped for a few cents per round trip in a stock. Given that investing buy its very nature involves long holding periods and (hopefully) large gains, the dangers associated with the activities of HFT are negligible for the average trader, and can be considered no more than a slight markup in execution costs. A whole other area not really touched upon in the answers above is the endemic instability that HFT can bring to entire financial markets. HFT is associated with the provision of liquidity, and yet this liquidity can vanish very suddenly at times of market stress as the HFT remove themselves from the market; the possibility of lack of liquidity is probably the biggest market-wide danger that may arise from HFT operations.