Stock Brokers and their Clients
What the domain tests
This domain covers the broker-client relationship: onboarding, authority to trade, account handling, charges, recordkeeping and conflicts of interest. Questions often turn on whether the broker acted within the client’s instructions.
Core rules
- Before trading, the broker must complete KYC, obtain a client agreement, assess the client’s profile and risk tolerance, and record a UIN.
- The broker must disclose commission, fees and charges, issue contract notes and account statements, and keep client money and securities segregated from its own.
- Non-discretionary accounts require the client’s instruction for each trade. Discretionary arrangements are tightly restricted and must be properly documented and authorised; a broker cannot assume discretion from silence.
- Client information is confidential, but the broker must report to regulators and comply with AML obligations.
- Complaints must be handled through a documented process, with escalation to PSX and SECP where the broker’s response is unsatisfactory.
Worked example
A client instructs a broker to buy 500 shares of a stock with a limit of Rs 80. The broker buys 700 shares at Rs 79. Even though the price was favourable, the broker exceeded the quantity authorised. The client is liable only for the 500 shares within the mandate; the extra 200 shares are an unauthorised trade. The broker should reverse or absorb the excess, document the error and report it under its error-handling procedure. A favourable price does not cure lack of authority.
Traps
Assuming a broker may trade on oral or implied authority; treating a favourable price as consent to exceed the order; confusing a discretionary account with a non-discretionary one; commingling client funds with firm funds.