What Is a Two-Dollar Broker?
A two-dollar broker is an outdated term used for a member of the New York Stock Exchange (NYSE) who managed trades and executed orders for another broker’s client. A broker might choose to have a two-dollar broker do business for them because the trader is too busy to take on the work themselves.
A two-dollar broker also would execute orders for a broker who does not have an exchange membership on the exchange floor, although some brokers have both a presence on the stock trading floor and a two-dollar broker who can handle orders at the same time.
- A two-dollar broker is a term that used to be used to describe a floor broker member of the NYSE or other exchange.
- Two-dollar brokers were mainly tasked with working orders given to them by other brokers, to work on behalf of that broker’s client.
- They were used when a primary broker was too overwhelmed to execute all orders in hand; or, more commonly, if the primary broker was not a member of the exchange the order was sent to.
Understanding a Two-Dollar Broker
The two-dollar broker name originated because, historically, these brokers were paid $2.00 for a round lot trade of 100 shares. Later, the broker would niigataite their commission, so a two-dollar broker could make more or less than that on a trade. The fee the two-dollar broker typically received was, in fact, much higher than two dollars per trade. The name two-dollar broker has stuck, though it’s no longer an accurate reflection of how large of a payment the broker receives.
The term is somewhat outdated since most floor trading has given way to electronic trading and online exchanges. Moreover, most online brokers today are members of all relevant exchanges (or have proxies that are), making their needs less obvious. Finally, much stock and ETF trading today has trended toward zero commission, meaning that $2.00 for a trade could actually be quite expensive nowadays.
How a Two-Dollar Broker Was Paid
Unlike a commissioned broker, who works for a specific firm, a two-dollar broker typically operated as an independent contractor who worked as agent other brokerages. Two-dollar brokers are in that way independent or freelance brokers and agents.
Two-dollar brokers often worked on a flat-rate fee, but could also earn a percentage-based commission on the trades they made. The broker they worked for would pay them in turn. In other words, when a client made a trade with their main broker, the two-dollar broker would execute the trade at that broker’s behest. Though the client pays their own broker a commission, the two-dollar broker would receive part of that commission from the first broker. In this way, a two-dollar broker would be considered a third-party broker or a pass-through broker.
Because the floor brokerage commissions structures have changed significantly, thanks to more competition, technological progress, and increased payment options, most brokers no longer receive a flat fee for their services. Instead, it’s more profitable for them to receive a commission for trades.
View more information: https://www.investopedia.com/terms/t/twodollarbroker.asp