Introducing brokers, clearing brokers, and risk

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bauhinia_investor
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Joined: Thu Jun 09, 2022 4:57 am

Introducing brokers, clearing brokers, and risk

Post by bauhinia_investor »

I understand the basic distinction between introducing brokers and clearing brokers, as explained here: https://www.finra.org/arbitration-media ... ring-firms

I just have a very basic question about risk when there is a relationship between between an introducing broker and clearing broker.

Suppose I have an account with introducing broker A, which uses clearing broker B. Suppose both are members of SIPC.

As I understand it, my securities and assets are essentially as safe as broker B is, since it is the carrying firm that actually holds the assets and records of which securities I own. So the risk say, of losing money due to bankruptcy, fraud, etc. is essentially just that of clearing broker, since that's where my assets are held.

There is, I suppose, some risk that the introducing broker is only pretending to convey orders to the clearing broker, but beyond that, I can't see what the additional risk would be (and that seems unlikely, in most instances).

But am I missing something here? Is there some significant risk involved in having an introducing broker as an intermediary?
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