Member: What It Means, How It Works, Exchange Membership

What Is a Member?

The term member firm refers to a brokerage or financial firm with membership to at least one organized stock exchange, commodities exchange, or another type of securities exchange. Member firms are given the rights and privileges to trade on the exchanges to which they belong. Membership is normally granted to a firm's professionals individually rather than to the brokerage itself.

A member is usually a trading or brokerage firm (or broker) that has been granted membership on an organized securities exchange. The number of individual members an exchange may have is often known as the number of "seats".

Understanding a Member

A broker-dealer or broker becomes a member of the NYSE or Nasdaq by filling out the appropriate forms and sending a check to the organization.

Members and member firms are regulated by the Financial Industry Regulatory Authority (FINRA). The organization operates independently outside of the government, writing and enforcing rules for broker-dealers, capital acquisition brokers, and funding portals registered in the United States.

NYSE Membership

Any registered and new U.S.-based broker-dealer that is a member of a self-regulatory organization (SRO) and who has an established connection to a clearing firm may become an NYSE member. A broker-dealer must send the membership application, agreements, and other appropriate forms to client relationship services, purchase a trading license and mail a signed copy of the applicant firm acknowledgment and the application fee to the NYSE. A broker becomes a member by filling out the appropriate NYSE form, such as a securities lending representative agreement, an equity trading license application, or a one-day equity trading license application and mailing it with a check to the NYSE.

The NYSE ceased selling seats in 2006 when it became a for-profit company. The 1,366 members at the time received 80,177 shares of the newly public company, plus $300,000 in cash and $70,571 in dividends. Membership is still sold via one-year licenses, which are still relatively difficult to obtain.

Nasdaq Member

A firm that is a FINRA, Philadelphia Stock Exchange (PHLX), or Bernie Exchange (BX) member becomes a Nasdaq member by completing the Nasdaq waive-in membership application and agreement along with the Nasdaq services agreement and submitting both with a check for $2,000. Proprietary trading firms that are members of another SRO submit a full Nasdaq membership application and agreement along with a supplemental information document, Nasdaq services agreement, and written supervisory procedures checklist. All documents must be submitted with a check for $2,000 to the Nasdaq.

Changes to Exchange Membership

Owning an exchange membership was once a matter of prestige as it indicated financial power, wealth, and influence. Being an exchange member meant that you were either a floor broker or trader and able to directly buy and sell securities listed on the exchange. It also came with the responsibility of maintaining order on the exchange's trading floor via market making.

Today, because of electronic trading, anyone can log in to their computer and brokerage account and buy or sell shares of a company. But before the advent of electronic trading, if you wanted to buy or sell shares of a company, you would have to contact a floor broker who would be able to execute your trade. This meant floor brokers were the middle-man/woman, the contact point, for anyone wanting to trade in the stock market; a very important position.

Because of the increasing globalization of financial markets, both the Nasdaq and NYSE are establishing partnerships with other stock exchanges: the Nasdaq is partnered with the London Stock Exchange (LSE); the NYSE is partnered with the Tokyo Stock Exchange and Euronext.

Since a Nasdaq member would meet lower minimum requirements to qualify for a listing, smaller companies are listed on a major exchange adding credibility to their products and services. The Nasdaq exchange also has lower listing fees. In addition, the Nasdaq features all-electronic trading with faster execution, which is increasingly the norm on worldwide trading exchanges. The NYSE still uses specialists working on the floor buying and selling stocks.