Broker-Dealers

A broker-dealer is an individual or firm acting as an agent or principal in a securities transaction. These entities play a crucial role in financial markets by assisting investors with executing trades and making informed financial decisions.

Roles of Broker-Dealers

Broker-dealers may act as agents, representing clients in transactions with third parties. Alternatively, they act as principals when trading securities for their own accounts, including selling customer securities from their own inventory.

The term "broker-dealer" is commonly used in U.S. securities regulation, reflecting the dual roles of brokers and dealers. In other countries, it refers to firms engaged in securities transactions on behalf of clients.

Regulation and Registration

A broker-dealer must be registered with the Financial Industry Regulatory Authority (FINRA) to operate in the United States. Registration allows them to buy and sell securities, offer investment advice, and solicit new business. Compliance with financial requirements and passing qualifying examinations are essential for registration.

Types of Brokerages

There are two main types of brokerages: full-service and discount. Full-service brokers provide comprehensive services, including financial advice, retirement planning, and various strategies. Discount brokers focus on executing trades as per client instructions.

Broker-Dealers and Dealers

Dealers engage in trading for themselves and maintain an inventory of securities. Primary dealers collaborate with the Federal Reserve to ensure liquidity in securities markets. Many institutional customers work with broker-dealers to execute trades on behalf of clients and employers.

Services Provided by Brokerage Firms

Brokerage firms offer tools and resources for investors to make trades and seek financial advice. In addition to executing trades, broker-dealers may provide services such as underwriting, market making, and custody.

FAQs

How do you become a broker-dealer?

Becoming a broker-dealer requires obtaining certifications and licenses from state and federal agencies, including FINRA, SIPC, and the SEC.

Who are the largest broker-dealers?

As of 2020, some of the largest broker-dealers include Fidelity, Charles Schwab, Wells Fargo, TD Ameritrade, and Edward Jones. These firms manage multiple billions of dollars.

What is the difference between a broker and a broker-dealer?

The primary difference is that brokers trade securities for clients, while dealers trade for themselves. Broker-dealers are certified to perform both roles, offering either full-service, including financial advice, or discount services focused on executing client trades.