Give-up is a procedure in securities or commodities trading where an executing broker places a trade on behalf of another broker. This arrangement is known as a “give-up” because the broker executing the trade does not take credit for the transaction in the official records. Such trades ordinarily occur when brokers have commitments that prevent them from executing trades personally, or they work on behalf of an interdealer broker or a prime broker.
Key Takeaways
- In a give-up agreement, an executing broker places a trade on behalf of another broker.
- The term “give-up” is used because the executing broker gives up credit for the trade on the record books.
- Give-up trades were more common before electronic trading but are less prevalent in modern markets.
- The acceptance of such trades is sometimes known as a give-in.
- Compensation for give-up trades is typically prearranged and not clearly defined by industry standards.
Delving into Give-Up Trades
Give-up trades are generally outdated in the modern financial markets due to the emergence of electronic trading. In past eras, particularly during floor trading, brokers busy with other engagements might arrange for another broker to execute trades on their behalf, known as proxy action. These prearranged agreements typically outline specific terms for implementing give-up trades, including compensation methods.
Give-Up vs. Give-In
Acceptance of a give-up trade, once executed, can be referred to as a give-in. However, the term “give-in” is rarely used and less recognized in financial terminology.
The Key Parties in a Give-Up Trade
A give-up trade typically involves three main parties:
- Executing broker (Party A): Responsible for implementing the trade.
- Client’s broker (Party B): The broker who receives credit for the executed trade.
- Opposite side broker (Party C): The broker taking the opposite side of the transaction.
In scenarios where both the original buying and selling brokers have other obligations (requiring additional brokers, identified here as Separate Traders), four parties could be involved. This gives rise to a situation known as give-up on both sides.
Payment arrangements ensure executing brokers are compensated, frequently done through retainer fees or per-trade commissions. Whether these payments are factored into client charges varies by agreement.
Give-Up Trade Example
Imagine Broker B receives a client order to purchase 100 shares of XYZ on the New York Stock Exchange (NYSE). Broker B, working at an upstairs desk of a large brokerage, directs the order to Floor Broker A to ensure execution is timely. Floor Broker A places the order and completes the purchase for Broker B’s client.
Despite Floor Broker A’s role in the transaction, the trade is officially recorded under Broker B’s name, reflecting B’s activity rather than A’s.
Give-Up in Prime Brokerage
Prime brokerages offer bundles of services to large clients, such as institutional investors and hedge funds. Clients focusing on investment strategies delegate trading duties to their prime brokers, which may in turn engage in give-up trades for those clients.
Understanding Trading Away
Trading away involves executing transactions through different brokers while managing them from a single account. This flexibility helps traders tap into markets or instruments their main broker might not support.
A Closer Look at the Master Give-Up Agreement
A Master Give-Up Agreement facilitates authorized transactions between customers and dealer banks. It outlines compensations, covering potential losses if prime brokers do not accept the give-up trades.
What is an AGU Agreement?
An Automatic Give-Up (AGU) agreement locks in transactions in recording systems. Like other agreements, they are reported to appropriate regulatory bodies like the Financial Industry Regulatory Authority (FINRA).
How Give-Up Trades Operate
Give-up trades operate under a reliance mechanism. If John wants to buy stock from Andy but neither can place the trade, a mediator like Mary can facilitate, executing orders electronically for efficiency.
The Bottom Line
While give-up trades played a vital role during manual trading days, their necessity diminished with the rise of electronic methods. Computers often optimize trade execution, minimizing the need for intermediary executions.
Related Terms: executing broker, interdealer broker, prime broker.
References
- U.S. Securities and Exchange Commission. “FX Prime Brokerage Agreement”.
- Financial Markets Lawyers Group. “FX Master Give-Up Agreement”.
- Financial Industry Regulatory Authority. “Trade Reporting Frequently Asked Questions”.
