In financial services, a broker-dealer is a

natural person In jurisprudence, a natural person (also physical person in some Commonwealth countries, or natural entity) is a person (in legal meaning, i.e., one who has its own legal personality) that is an individual human being, distinguished from the br ...

, company or other organization that engages in the business of trading

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and derivatives trading process. Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of

commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with co ...

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

s or investment companies. When executing trade orders on behalf of a customer, the institution is said to be acting as a

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

. 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 A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...

shares.

Main points of activity

* Professional participant in securities market who carries out dealer activity shall be called dealer. * Announcing the price, the dealer is committed to 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.

Functions

* All the functions of stockbroker including financial consulting * Organization and support of 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 In economics and finance, the price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers. Overview Price discovery is diff ...

and execution between dealers.

Regulation

United States

:''See:

Securities regulation in the United States Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, ...

'' In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

, 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 The Securities Investor Protection Corporation (SIPC ) is a federally mandated, non-profit, member-funded, United States corporation created under the Securities Investor Protection Act (SIPA) of 1970 that mandates membership of most US-register ...

(SIPC) (pursuant to ) and are subject to its regulations. Some regulatory authority is further delegated to the

Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...

(FINRA), a

self-regulatory organization A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could exist in place of government regulation, or applied in addition to governmen ...

. Many states also regulate broker-dealers under separate state securities laws (called "

blue sky law A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all se ...

s"). 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. When acting on behalf of customers, broker-dealers have a duty to obtain "best execution" of transactions, which generally means achieving the best economic price under the circumstances. On April 28, 2004, the SEC voted unanimously to change the net capital rule which applies to broker-dealers, thus allowing those with "tentative net capital" of more than $5 billion to increase their leverage ratios. The rule change remains in effect, though subject to modifications. Although broker-dealers often provide investment advice to their clients, in many situations they are exempt from registration under the U.S. Investment Advisers Act of 1940, so long as (i) the investment advice is "solely incidental" to brokerage activities; and (ii) the broker-dealer receives no "special compensation" for providing the investment advice. Both elements of this exemption must be met to rely on it. Many broker-dealers also serve primarily as distributors for

shares. These broker-dealers may be compensated in numerous ways and, like all broker-dealers, are subject to compliance with requirements of the Securities and Exchange Commission and one or more self-regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA). The forms of compensation may be sales loads from investors, or Rule 12b-1 fees or servicing fees paid by the mutual funds. There are several online portals that offer broker dealer assistance and search capabilities.

United Kingdom

UK securities law uses the term

intermediary An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In l ...

to refer to businesses involved in the purchase and sale of securities for the account of others. The Financial Conduct Authority authorises and regulates companies engaging in such activity as "regulated activities"Financial Services and Markets Act 2000, schedule 2
/ref> under the

Financial Services and Markets Act 2000 The Financial Services and Markets Act 2000c 8 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority (FSA) as a regulator for insurance, investment business and banking, and the Financial Ombudsman Serv ...

Japan

The common Japanese term for a broker-dealer is . Securities companies are regulated by the

Financial Services Agency The is a Japanese government agency and an integrated financial regulator responsible for overseeing banking, securities and exchange, and insurance sectors in order to ensure the stability of the financial system of Japan. The agency operate ...

under the

Financial Instruments and Exchange Law The , promulgated on June 14, 2006, is the main statute codifying securities law and regulating securities companies in Japan. The law provides for: * Registration and regulation of broker dealers and their registered representatives * Disclosur ...

. The "big five" are Nomura Securities,

Daiwa Securities is a Japanese investment bank that is the second largest securities brokerage after Nomura Securities. Major subsidiaries include ''Daiwa Securities'', which offers retail services such as online trading to individual investors and investment ...

, SMBC Nikko Securities, Mizuho Securities, and

Mitsubishi UFJ Securities is the investment banking arm of the Mitsubishi UFJ Financial Group (MUFG), a financial services company which is the largest in Japan measured by assets. The company is headquartered in Tokyo, Japan. The company was established on October 1, ...

. Most major

s in Japan also maintain broker-dealer subsidiaries, as do many foreign commercial banks and

s. Securities companies must be organized as

kabushiki kaisha A or ''kabushiki kaisha'', commonly abbreviated K.K. or KK, is a type of defined under the Companies Act of Japan. The term is often translated as "stock company", "joint-stock company" or "stock corporation". The term ''kabushiki gaisha'' i ...

with a

statutory auditor Statutory auditor is a title used in various countries to refer to a person or entity with an auditing role, whose appointment is mandated by the terms of a statute. World usage A "statutory audit" is a legally required review of the accuracy ...

or auditing committee, and must maintain minimum shareholder equity of ¥50 million.

Largest dealer banks

* Bank of America Merrill Lynch * Barclays * BNP Paribas * Citigroup * Credit Suisse *

Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...

* Goldman Sachs * HSBC *

JPMorgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the ...

Morgan Stanley Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...

* Nomura * Commerzbank AG * Societe Generale *

The Royal Bank of Scotland The Royal Bank of Scotland plc (RBS; gd, Banca Rìoghail na h-Alba) is a major retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest (in England and Wales) and Ulster Ba ...

* UBS *

Wells Fargo Wells Fargo & Company is an American multinational financial services company with corporate headquarters in San Francisco, California; operational headquarters in Manhattan; and managerial offices throughout the United States and intern ...

Bank of New York Mellon The Bank of New York Mellon Corporation, commonly known as BNY Mellon, is an American investment banking services holding company headquartered in New York City. BNY Mellon was formed from the merger of The Bank of New York and the Mellon Fina ...

References

External links

Understanding Derivatives: Markets and Infrastructure - Chapter 3, Over-the-Counter (OTC) Derivatives
Federal Reserve Bank of Chicago, Financial Markets Group {{Authority control Brokerage firms Financial markets Fixed income