Key Takeaways
- Executing broker trades, clearing broker settles.
- Clients optimize execution and clearing separately.
- Give-up fees compensate executing brokers.
- Allows margin netting and risk reduction.
What is Give Up?
A give-up is a trade execution arrangement where one broker executes a trade but credits it to another broker responsible for clearing and settlement. This setup allows clients to optimize execution quality while using preferred brokers for clearing services.
Originally common in securities and derivatives markets, give-ups facilitate specialized roles between executing and clearing brokers, improving operational efficiency and reducing costs.
Key Characteristics
Give-ups involve distinct roles and agreements that define trade execution and clearing responsibilities:
- Multiple Parties: Typically includes a customer, executing broker (give-up broker), and clearing broker (take-up broker).
- Execution vs. Clearing: The executing broker places the trade, while the clearing broker handles settlement, margin, and record-keeping.
- Fee Structures: Compensation for executing brokers often involves prearranged give-up fees.
- Risk Management: Clearing brokers assume post-trade risks and margin requirements, impacting capital efficiency.
- Regulatory Compliance: Formal give-up and take-up notifications are required in some markets to prevent allocation errors.
How It Works
When you place an order, the executing broker completes the trade on your behalf but "gives up" the trade to the clearing broker for settlement and custody. This process separates execution from clearing functions, enabling you to benefit from specialized expertise in each area.
For example, a floor broker might execute an order on an exchange, then give up the trade to your preferred clearing broker. This arrangement helps optimize trade execution, reduce margin costs through netting, and streamline back-office operations.
Examples and Use Cases
Give-up trades are prevalent in various markets and scenarios, demonstrating their versatility:
- Airlines: Delta and American Airlines historically use give-ups in derivatives trading to separate execution from clearing functions.
- Futures and Options: Exchanges like JPX use give-up mechanisms to net option positions, reducing margin requirements for customers.
- Prime Brokerage: Hedge funds often execute trades through one broker and give them up to prime brokers for consolidated clearing and risk management.
- Equities Floor Trades: Floor brokers execute orders for clients and give up trades to executing brokers who handle client accounts and clearing.
- Check out our guide on best commission-free brokers to understand how execution costs can impact your trading strategies.
Important Considerations
While give-ups offer operational benefits, you should consider potential risks such as mismatched trade allocations, rejected give-ups, and delayed notifications, which can affect settlement and margining. Ensuring clear agreements and robust communication between brokers is essential.
Additionally, advances in electronic trading platforms have reduced reliance on give-ups in some markets, but they remain relevant in complex derivatives and prime brokerage contexts where specialized clearing arrangements provide tangible advantages.
Final Words
Give-up trades allow you to optimize execution and clearing by leveraging different brokers’ strengths, but they require clear agreements on fees and responsibilities. Review your brokerage arrangements carefully to ensure the trade-offs align with your cost and risk preferences.
Frequently Asked Questions
Give Up is a trade arrangement where one broker executes a trade but credits it to another broker who handles clearing, settlement, and record-keeping. It allows clients to benefit from specialized execution while using preferred firms for clearing.
The main parties include the customer who initiates the trade, the executing broker who places the order, and the clearing or carrying broker who accepts the trade for settlement and record-keeping. Sometimes, an account manager or prime broker is also involved in complex transactions.
Brokers use Give Up trades to leverage the strengths of different firms—executing brokers provide better execution or access, while clearing brokers offer efficient settlement and margin management. This arrangement can reduce costs and improve operational efficiencies for clients.
Customers can optimize their trades by selecting brokers for execution and clearing based on liquidity, pricing, or margin advantages. For example, netting positions through Give Up can reduce margin requirements and avoid unnecessary payments between firms.
Reverse Give Up occurs when a prime broker receives client FX trades executed by other dealers, enters offsetting trades, and manages exposure through agreements. This helps prime brokers efficiently handle client flows and risk.
Fees are typically prearranged between brokers and are not standardized. Executing brokers often receive a give-up fee as compensation for placing the trade, while clearing brokers handle settlement without direct execution fees.
If a broker lacks direct access to a trading floor, they may ask another broker to execute the trade. That executing broker performs the trade on the floor then gives up the trade to the original broker, who clears and credits the client’s account.
The clearing broker accepts the trade from the executing broker, handles settlement, margin requirements, and maintains trade records. This ensures that all post-trade obligations are properly managed.
