[0:04]Today, we will address the second subject of that chapter, which is the brokers, the second element of stock market, brokers. Brokers are those key actors of financial market who have the major role of conveying their customers' orders to the market. When we talk about brokers, the broker is a person, but that person are simply a part of a financial institution, which are the brokers' firms. So, the major role of broker is to convey its customers' orders to the market, why simply because the off-floor traders, the ordinary traders, whether they are physical persons or legal persons, do not have the right to intervene directly to the market. They don't have the really skills to intervene directly in the market.
[1:06]Markets are organized, are structured, so not anyone has the right to intervene directly in that market. That's why I need to set an account with my broker in order to be able to invest in stocks, in stock exchanges. So, I introduce my order, the order will be received by my broker, and the broker convey the order to the market. This is the route, like me, of course, we are connected to our brokers and the brokers are connected to the market via or through the trading platform or the trading system, the quoting system. Because don't forget now that when we talk about stock exchanges, we are automated trading process in stock exchanges. Broker provide brokers provide a variety of other services, uh, custody of purchased stocks, cash loans, loans of stocks, record keeping, and tax reporting. Custody of purchased stocks, so simple, it mean that your broker will keep virtually all the record about your fi or of of your operation or trading operation in the financial market. You have a cash loans with your broker, stocks or securities cash account with your broker, security account with your broker, and any operation that imply the use of your cash and the transfer of securities ownership will be captured and recorded by your broker, why because the broker has also that important mission of keeping your securities or keeping your stocks. This is what we call the custody of purchased stocks. Cash loans in order to increase my ability to invest in financial market and my ability to make profit, in order to increase my exposure in financial market, I can get a loans from my broker. And this is what we call the leveraged investments and that leveraged investments will be performed to the cash loans. My lender in this case will be my broker. The broker provide the necessary amount that will simply allow me to increase my ability to invest in financial markets and this is the role of cash loans. Loans of stocks, yeah, you can also get a loans of stocks, you can borrow stocks if you want to engage in short ceiling. I will try to simplify that short selling. Suppose that the market is bearish, it means simply that prices are in decreasing or the prices are following a downward trend. In this case, I can simply sell today, open a short position, that is burrowing securities or borrowing stocks for my broker, my those stocks will be sold today at a higher price and in the future, after the price decrease become reality, I can buy them back and then returning them to my broker. So, it will in the case of declining prices, I will I will be always able to make profit by selling something that doesn't belong to me, the borrow stocks and buying them at lower price in the future in order to return them to my broker and of course, the difference between the two prices, the higher price, the higher prices, the lower price, the higher price, the lower price will be my profit. Other important role for the broker is the record keeping and tax reporting. You have to pay taxes when you make profit and that relationship between you and the tax services will be managed by your broker through the record keeping and the tax reporting. At the theoretical level, I can describe the relationship between the customer and the broker as an agency relationship. In this agency relationship, the customer is the principle, why the principle? Because the the the customer cannot intervene directly to the market, cannot get access to all the details about the trading process in the market. Why simply because the customer relies on its broker to handle that part of the trading activity. The customer in that relationship is the principle. The broker, the broker has a sort of a power in that relationship, why the by because the broker acts on behalf of its customer and in accordance with its instructions. With his instructions, but in the same time the broker has the right to engage in proprietary trading, that it buy that is buying and selling securities for his own behalf. And in this case, suppose that the two major part to the customer and the broker in that relationship are interesting in the same trading opportunity, buying 100 stocks general mother. Here the broker can simply delay the the execution of its customer order in order to seize that opportunity for his own behalf and this is why we describe that relationship as an agency relationship because we can have a sort of risks of divergence between the customer and the broker's goals.
