The Corner for Nov. 1, 2013

Several steps are involved in processing a transaction at a brokerage house. The process begins when the client places an order with a broker. The broker writes the order ticket and submits it to these departments.

• Order department (wire room, order room). This department transmits the order to the proper market for execution. Completed trade tickets are sent to the broker who initiated the trade and to the purchase and sales department.

• Purchase and sales department. The P&S department handles all billing, typically a computerized process. It performs computations for each trade and records all transactions in the client’s accounts. It mails the trade confirmation, which specifies the commission and total costs.

• Margin or credit department. This department handles activities involving credit for cash as well as margin accounts. It computes the date on which clients must deposit money and the amount of the deposit.

• Cashiering department (“the cage”). This department is responsible for receiving and delivering securities and money. It issues payment only if instructed to do so by the margin department. It sends certificates to transfer agents to be transferred and registered, and then forwards the certificates to clients. Most brokerage houses use a clearing corporation for such services as the delivery of securities and settlement of trades.

A clearing corporation can simplify this process by providing specialized comparison clearance and settlement services. A clearing corporation, in effect, acts as a secretary-bookkeeper for a large number of broker-dealer firms. Its function is similar to the role the Federal Reserve Board plays for its member banks. A clearing corporation totals all trades done on a daily basis for each of its participating firms and balances the books of one firm against those of another.

Other departments which are involved in client transactions include:

• Reorganization department. This department handles any transaction that represents a change in securities outstanding. This includes such actions as exchanging or transmitting any securities held for customers involved in tender offers, bond calls and redemptions of preferred stocks, mergers and acquisitions.

• Dividend department. This department is responsible for crediting client account with dividends and interest payments on client securities held in the firm’s name (street name). (When a client doesn’t receive stock certificates and the brokerage firm holds the security, which is known as “holding in street name or the firm’s name.”)

• Proxy department. This department has the responsibility of sending proxy statements to clients whose securities are held in the firm’s name. It also sends out financial reports and other publications received from publicly held corporations for their stockholders.

• Stock record department. This department maintains the ledger that lists the owner of the stock and the location of the certificate.

• Controller’s department. This department is responsible for accounts payable, employee payroll and financial reports to regulatory agencies. The department also sends statement to clients.

Quote of the week: “Everyone should learn to do one thing supremely well because he likes it and one thing supremely well because he detests it.” — New York Times, 12 Jan., 1964

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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