In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and derivatives trading process.[1]
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer. Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm's holdings.
In addition to execution of securities transactions, broker-dealers are also the main sellers and distributors of mutual fund shares.[2]
Main points of activity
After announcing the price, the dealer must announce other essential conditions of the buy-sell contract of securities: minimum and maximum number of securities subject to purchase and/or sale, as well as the term of announced price's validity. Dealers perform all the functions of a stockbroker including financial consulting. They organize and support turnover (liquidity) or market-making (price announcing, duty of sell and buy of security at announced price, announcing of min and max number of securities that can be bought/sold at announced price, implementing time periods when announced prices are available. Dealers are large financial institutions that sell securities to end users and then hedge their risk by partaking in the interdealer market. Interdealers facilitate price discovery and execution between dealers.[3]
Regulation
United States
In the United States, broker-dealers are regulated under the Securities Exchange Act of 1934 by the Securities and Exchange Commission (SEC), a unit of the U.S. government. All brokers and dealers that are registered with the SEC (pursuant to ), with a number of exceptions, are required to be members of the Securities Investor Protection Corporation (SIPC) (pursuant to ) and are subject to its regulations. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Many states also regulate broker-dealers under separate state securities laws (called "blue sky laws").[4]
The 1934 Act defines "broker" as "any person engaged in the business of effecting transactions in securities for the account of others", and defines "dealer" as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise". Under either definition, the person must be performing these functions as a business; if conducting similar transactions on a private basis, they are considered a trader and subject to different requirements.[5]
See also
- Broker
- Securities market participants (United States)
- Trader (finance)
- Stockbroker
- Commodity broker
- Mutual fund
- Floor broker
External links
- Understanding Derivatives: Markets and Infrastructure - Chapter 3, Over-the-Counter (OTC) Derivatives Federal Reserve Bank of Chicago, Financial Markets Group
References
- Lemke and Lins, Soft Dollars and Other Trading Activities (Thomson West, 2013-2014 ed.).^
- Lemke and Lins, Mutual Fund Sales Practices (Thomson West, 2013).^
- Understanding derivatives^