The Broker-Dealer
A broker-dealer (B-D) is an individual or company that trades securities for its own account or on its clients’ behalf.
Most stock brokerages in the United States act as both agents and principals, so the term broker-dealer is used to describe them in the language of securities regulation.
When acting as an agent for its clients, a brokerage is a broker (or agent), but when acting as a dealer (or principal), it is a principal (or trader) for its own account.
KEY POINTS
- A broker-dealer is a type of financial institution that facilitates securities transactions on behalf of clients and may also engage in such transactions on its own behalf.
- When a broker-dealer executes orders on its clients’ behalf, it is acting as a broker or agent, and when it trades on its own account, it is acting as a dealer or principal.
- Both wirehouses and independent broker-dealers exist, with the former selling the company’s own products and the latter selling those of third parties.
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Understanding the Role of a Broker-Dealer
There are a number of crucial roles that broker-dealers play in the financial sector.
Some examples are advising clients on financial matters, engaging in market-making, facilitating trades, publishing research on the investment market, and financing businesses.
There is a wide range in size for broker-dealers, from solitary independent boutiques to massive offshoots of major commercial and investment banks.
A broker-dealer can fall into one of two categories:
- A company that sells its own products to customers, known as a “wirehouse,” and
- A company that sells products from other companies, known as a “independent broker-dealer,” respectively.
The Financial Industry Regulatory Authority (FINRA) reports that there are more than 3,975 broker-dealers available to investors. We. Would touch on this in a future article.
A Broker-Dealer’s Process Explained
Broker-dealers are intermediaries that buy and sell securities and distribute other types of investment products.
As the name suggests, they serve a dual purpose in discharging their duties. As dealers, they represent the brokerage firm and conduct business on its behalf.
Brokers act as intermediaries between buyers and sellers of securities, facilitating trades on their clients’ behalf.
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They act as a conduit for the trading of securities on the open market and as market makers by purchasing and selling securities for their own accounts to ensure a liquid market for their customers.
Broker-dealers play a crucial role in the securities market and are rewarded handsomely for their services.
Conclusion
Underwriting of securities offerings is another service provided by broker-dealers with direct ties to investment banking.
When a broker-dealer acts as an underwriter for a stock or bond offering, either as the offering’s principal underwriter or as a member of the underwriting syndicate, it makes a “firm commitment” to the issuer to sell a certain number of securities to the public in exchange for compensation.
If they are unable to sell all of the securities in the offering, they may be forced to buy some for themselves.
The broker-dealers’ clients are typically the target of their distribution efforts once the underwriting process is complete and the securities are issued.
The firms’ financial advisors play the role of brokers in this process by actively seeking out new clients and recommending that their existing ones buy the security.
Although their only contractual obligation is to the issuer, the broker-dealers in this case are serving the interests of the issuer, themselves (by collecting a distribution fee), and their clients.
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