This is a contract between an investment house that sponsors one of its brokers to occupy a seat in the New York Stock Exchange (NYSE).
ABC Agreement Details
ABC Agreements are so named for the standard conditions NYSE trading floor brokers enter into with their employing financing companies. This agreement states options for the brokerage house and the employee regarding the opportunity of trading on the stock exchange, also called a seat.
If a broker, who the NYSE deems an independent entity, chooses to move on from the company that has bought the seat, they can:
- Reassign the seat to another of that brokerage firm’s employees
- Sell the seat and return the proceeds of the sale to that investment house
- Retain the seat, provided he or she is willing to buy another seat for that firm’s employee on the trading floor
The NYSE closely vets ABC Agreements, imposing several restrictions on the investment brokerages and other institutions that can hold a seat on the trading floor. These provisos ensure that the stockbrokers representing those firms that have provided financing are not less than ethical.
Example of ABC Agreement
The price for membership on the NYSE, also called seats, varies according to how economic factors like Gross Domestic Product (GDP) perform. Seat prices will be high when the GDP is rapidly growing but will decline when the economy is in recession.
A seat in 1929 sold for $635,000, but the same transaction made by an investment house today would cost $6,000,000. Since 2000, prices for trading floor seats have ranged between one and four million dollars.
Trading floor seats aren’t easily transferable on the NYSE, and another system sells one-year trading licenses, which give the holder direct access to the exchange. Some traders only deal in bonds, and their licenses cost as little as $1,000, but one-year licenses for stock traders cost somewhere in the region of $40,000.
Significance of an ABC Agreement
An ABC Agreement represents the independence of the employee as recognized by the stock exchange. The NYSE is the consenter of this agreement which protects the financing companies should the broker leave them for another brokerage firm.
There are vital stipulations in the ABC Agreement, viewed as privileges for the firms occupying the trading floor seat. The first allows stock exchange members to transfer seat ownership to another employee of the investment house.
This stipulation gives the brokerage firm the ability to continue transacting when the employee occupying the seat is no longer with them. The firm that occupies a seat at the exchange can also buy an additional seat while remaining the owner of the first seat.
Types of ABC Agreements
Brokerage firms seeking to increase their presence on the trading floor can have more than one seat, but within limits on the number of seats, one business entity can own. The most significant benefit of an ABC Agreement to the trading floor broker is that the trading floor seat gets purchased for them.
Since an ABC Agreement’s regulations target the investment companies, as opposed to individual brokers, the firms get motivated to monitor their employee’s activities. If they fail to rein in their broker’s actions, these companies stand to lose the NYSE seat while also facing further penalties.
In the third stipulation, should such a broker sell a seat, they must give the profit to the investment firm. Restrictions exist on the process of selling seats, and new occupiers meet the same rigid criterion imposed on organizations wishing to fund the seats purchased by their employees.
ABC Agreements vs. Acceptable Behavior Agreements
A well-prepared and approved ABC Agreement is essential to ensure that seats on the NYSE are well utilized. The ABC Agreement is a contract between the financier or brokerage firm that provides financing for the seat at the stock exchange and an employee of that investment house who buys the right to use it.
Another term easily confused with ABC Agreements is Acceptable Behavior Contracts. Also regarded as ABC Agreements, Acceptable Behavior Contracts are agreements between adults or children. They are formal, written, and between one individual of any age, with parents or guardian being the signatory.
An ABC agreement of this sort can also apply between a person or child and a school, registered landlord, local police, or housing department. The NYSE, and every other stock market, is brimming with rival investment firms, and the ABC agreement acts as a barrier of protection should the broker decide to take their skills elsewhere. This agreement exists because the stock exchange prohibits firms from becoming members and is only valid if the NYSE gives its consent. Investment houses ensure that, should the employee decide to move on, it shall not damage their reputation on the exchange.