What Does an outside Broker Do?

An outside broker is an individual who invests in the stock or real estate markets either on his or her own behalf or that of clients, but is not a member of a stock exchange. Since only members of a stock exchange can officially conduct transactions, an outside broker passes his or her exchange-based trades on to a member of the relevant exchange for action. The exception to this is a security that is traded directly overt-the-counter (OTC) or electronically outside of actual stock exchanges that an outside broker handles.

Certain securities do not meet the requirements for being listed on a stock exchange due to limited trading volume on them, insufficient capitalization by the company, and others. These securities, which are often referred to as penny stocks, are considered to be high-risk investments that agency brokers will not handle. One of the primary outside broker duties, therefore, is to deal in these types of securities for interested investors.

Real estate can also involve an outside broker when an agency is representing both the buyer and seller of a property. To avoid conflict of interest in the transaction, the agency may hire an outside broker to act on behalf of either the buyer or seller. In real estate, an outside broker can be referred to as a buyer broker when he or she is an independent agent that helps a customer find a house or commercial property at a fair price by working with other real estate agencies and their listings.

In the past, especially in the UK, outside broker jobs were discredited as being crooked activities and they were referred to as "bucket shop keepers." Such a commission broker did not actually buy or sell securities, but instead would essentially place bets on them as to whether they would rise or fall in value on behalf of clients. This was akin to the bookie trade for gambling, though many bucket shop keepers ran legitimate businesses. The practice was also common in the commodities trading market centered in Chicago in the US in the early 19^th century, known as "the wheat pit."

While outside broker requirements may be more lax than those of a broker of record at an agency, certain government requirements still have to be met in order to actively trade securities. In the US, a broker has to work for a brokerage house for four months before he or she can take the General Securities Registered Examination, after which he or she can operate on his or her own. Some states in the US also require a broker to pass the Uniform Securities Agents State Law Examination. Other nations have similar requirements, with Canada requiring brokers to be licensed by passing two parts of the Canadian Securities Course (CSC) and the Conduct Practices Handbook. In Hong Kong, a broker is required to work at a licensed brokerage house for three years, and two exams are required in the UK under Title XII, the Chartered Institute for Securities and Investment.