A "two-dollar broker" was a floor broker on exchanges like NYSE who managed orders from other brokers' clients when the main broker was too busy or not a member of the exchange.
Basics
In the past, a "two-dollar broker" referred to an NYSE member who executed orders for another broker's client. This arrangement occurred when the primary broker was too occupied to manage these trades themselves. Additionally, a two-dollar broker assisted brokers without exchange membership on the trading floor, sometimes alongside brokers who had a dual presence for order handling.
A Brief History
These brokers were called "two-dollar brokers" because they were paid $2.00 for a 100-share trade, with the actual amount varying depending on negotiated commissions. Despite the name, these brokers earned more. Nowadays, the term is outdated because electronic and online trading has replaced floor trading. Most online brokers are exchange members, so the need for such brokers has decreased. Also, with many stock and ETF trades having zero commissions, the old $2.00 fee could be expensive.
Role of Two-Dollar Brokers
In contrast to commissioned brokers tied to specific firms, two-dollar brokers functioned as independent agents, often freelancing for various brokerages. These brokers typically earned a flat fee or a percentage-based commission on their trades, paid by the broker they assisted.
Here's how it worked: When a client conducted a trade through their main broker, the two-dollar broker executed the trade on their behalf. While the client paid a commission to their primary broker, a portion of that commission would go to the two-dollar broker, making them a third-party or pass-through broker.
Changes in commission structures, driven by competition, technology, and payment options, have reshaped floor brokerage. Nowadays, brokers find commissions from trades more lucrative than traditional flat fees.
Conclusion
Although electronic and online trading has largely replaced the role of two-dollar brokers, they played an important part in the history of floor trading on exchanges like the NYSE. These independent agents managed orders from other brokers' clients and were compensated with either a flat fee or a percentage-based commission. Their role as pass-through brokers helped ensure efficient trading on the exchange.