Broker-dealers in the United States operate under one of three models, and the differences come down to who talks to the customer and who holds the money. Introducing, clearing, and self-clearing broker-dealers all move securities trades from order to settlement, but they split the work in different ways. An introducing firm handles the client relationship and sends orders to a separate clearing firm that processes, settles, and safeguards assets. A self-clearing firm does both jobs in-house. The model a firm chooses drives its capital requirements, its regulatory exposure, and how much of your account it actually touches.
What an Introducing Broker-Dealer Does
An introducing broker-dealer is the firm most investors actually talk to. It opens accounts, provides investment advice, solicits orders, and handles the day-to-day client relationship. Smaller and boutique brokerages often operate this way. The whole business is built around the front end of investing: research, portfolio strategy, and order entry.
What an introducing firm does not do is hold your money or your securities. When you place an order, the firm transmits it to a clearing firm for execution, settlement, and safekeeping. Your assets live at the clearing firm. That arrangement lets smaller brokerages compete without building the back-office infrastructure that trade processing demands, and it keeps their net capital requirements low, because they never take physical custody of client wealth.
What a Clearing Broker-Dealer Does
Clearing broker-dealers are the operational backbone of the securities markets. They handle everything that happens after a trade is placed: matching buyers with sellers, confirming trade details, moving cash one way and securities the other, and making sure everything lands in the right account. Most of that processing runs through the National Securities Clearing Corporation, a subsidiary of the Depository Trust & Clearing Corporation that acts as a central counterparty for virtually all U.S. equities and bond trades.1DTCC. National Securities Clearing Corporation
A single clearing firm may service dozens or hundreds of introducing broker-dealers at once. That volume is the point. Pooling trade processing across many client firms produces economies of scale that no individual introducing firm could match on its own. The infrastructure is substantial: real-time trade matching, regulatory reporting engines, custody platforms, and the capital reserves to back it all up.
The clearing firm also handles most post-trade administration. It maintains the official books and records for customer accounts carried on a fully disclosed basis, safeguards funds and securities under SEC Rule 15c3-3, and sends account statements to investors at least once per calendar quarter under FINRA Rule 2231.2FINRA. FINRA Rule 2231 – Customer Account Statements It prepares and issues Form 1099-B to customers and the IRS each year, reporting proceeds from securities sales.3Internal Revenue Service. Instructions for Form 1099-B (2026)
How Clearing Firms Make Money
Clearing firms charge per-trade processing fees to the introducing firms they service, but that’s only one revenue stream. A bigger one is interest on margin loans. When a customer borrows to buy securities, the clearing firm extends the credit and collects interest on the balance. Rates vary between firms, and some clearing brokers use netting policies that sweep cash balances against margin debt to reduce the customer’s interest charges.4Investor.gov. Investor Bulletin: Interested in Margin? Understand Interest
Securities lending is another. When customers hold securities in margin accounts, the clearing firm can lend those shares to other market participants, typically short sellers, and collect a fee. For heavily shorted or hard-to-borrow stocks, those lending fees can be substantial. The revenue is largely invisible to the average investor but is a meaningful part of the clearing business model.
What a Self-Clearing Broker-Dealer Does
Self-clearing broker-dealers handle everything in-house: client relationships, order entry, trade execution, settlement, custody, and recordkeeping. No outside clearing firm is involved. The largest retail brokerages and institutional trading houses typically operate this way, because their transaction volume justifies the investment in proprietary clearing technology.
The advantages are real. A self-clearing firm controls the entire lifecycle of a trade, which means faster processing, tighter integration between front-office and back-office systems, and no per-trade fees flowing to an outside partner. The firm can customize its settlement workflows, build proprietary risk management tools, and capture revenue streams that would otherwise go to a third party, including margin interest and securities lending income.
The tradeoff is that the firm absorbs all of the operational risk. When a self-clearing firm makes a trade processing error, it eats the loss in its own error account. An introducing firm in the same situation can lean on its clearing partner’s infrastructure and, in some cases, shift liability under the terms of the carrying agreement. Self-clearing also means direct responsibility for every regulatory obligation: custody rules, reserve computations, recordkeeping, regulatory reporting, and maintaining enough net capital to satisfy the SEC. For most smaller firms, that math doesn’t work.
How Introducing and Clearing Firms Divide the Work
The relationship between an introducing firm and its clearing firm is governed by a carrying agreement that must be submitted to FINRA for approval before it takes effect. Under FINRA Rule 4311, the agreement has to spell out which firm handles each operational responsibility, including opening and approving accounts, accepting and transmitting orders, extending credit, delivering funds and securities, preparing trade confirmations, maintaining books and records, and monitoring accounts.5FINRA. FINRA Rule 4311 – Carrying Agreements Nothing is left ambiguous. If a task isn’t explicitly assigned, neither firm can assume the other is handling it.
Fully Disclosed vs. Omnibus Arrangements
Carrying agreements come in two flavors. In a fully disclosed arrangement, the clearing firm knows the identity of every end customer. Your name, account number, and holdings are visible to both the introducing firm and the clearing firm, and you receive account statements directly from the clearing firm. Most retail brokerage relationships work this way.
In an omnibus arrangement, the introducing firm keeps all the underlying customer records on its own systems and reports transactions to the clearing firm only in aggregate. The clearing firm sees one large pooled account rather than individual investors. This structure is more common with institutional intermediaries and fund distributors than with retail brokerages. Because the clearing firm has limited visibility into who actually owns the assets, the introducing firm carries a heavier compliance burden.
Net Capital Minimums by Model
SEC Rule 15c3-1, the Uniform Net Capital Rule, sets the financial floor every broker-dealer must maintain, and the required amount depends on what the firm actually does with customer assets. Firms that carry customer accounts and hold funds or securities must maintain at least $250,000 in net capital.6eCFR. 17 CFR 240.15c3-1 – Net Capital Requirements for Brokers or Dealers That threshold applies to clearing firms and self-clearing firms alike.
Introducing broker-dealers face lower requirements because they never hold customer assets. A firm that introduces customer accounts on a fully disclosed basis and receives, but does not hold, customer securities must maintain at least $50,000 in net capital. Firms dealing exclusively in mutual fund shares or insurance company separate account interests face a $25,000 minimum.6eCFR. 17 CFR 240.15c3-1 – Net Capital Requirements for Brokers or Dealers
Beyond the flat dollar minimums, broker-dealers must also satisfy a ratio test. Under the standard method, a firm’s total indebtedness to all other persons cannot exceed 1,500 percent of its net capital. For firms in their first year of operation, the limit is tighter at 800 percent.6eCFR. 17 CFR 240.15c3-1 – Net Capital Requirements for Brokers or Dealers
Firms that carry customer accounts can elect an alternative method instead of the aggregate indebtedness test. Under that approach, the firm must maintain net capital equal to the greater of $250,000 or 2 percent of its aggregate debit items, which roughly represent the total amount customers owe the firm. The alternative method is more common among larger clearing and self-clearing firms because the 2 percent calculation scales with business volume. A firm that elects the alternative method must notify its examining authority in writing and cannot switch back without SEC approval.6eCFR. 17 CFR 240.15c3-1 – Net Capital Requirements for Brokers or Dealers
Falling below the required net capital triggers immediate consequences. The firm must notify its regulator, and depending on the severity and duration of the shortfall, it may face restrictions on business activity or suspension of operations.
Where SIPC Protection Sits
The Securities Investor Protection Corporation protects customer assets when a member brokerage firm fails financially. Coverage is up to $500,000 per customer, including a $250,000 limit on cash. SIPC does not protect against investment losses, bad advice, or the decline in value of securities. It covers the custody function: restoring to customers the cash and securities that were in their accounts when the firm entered liquidation.7Securities Investor Protection Corporation (SIPC). What SIPC Protects
For investors using an introducing broker, SIPC protection runs through the clearing firm that actually holds the assets. If the clearing firm fails, SIPC steps in to recover customer property. If the introducing firm fails but the clearing firm stays solvent, customer assets are generally safe because they were never held at the introducing firm in the first place. Customers whose accounts are introduced by different introducing firms but carried at the same clearing firm are each eligible for separate SIPC protection.8Securities Investor Protection Corporation (SIPC). Resources – FAQs
SIPC does not cover commodity futures contracts, foreign exchange trades, or unregistered investment contracts, including certain digital assets. Money market mutual funds, however, are protected as securities.7Securities Investor Protection Corporation (SIPC). What SIPC Protects