A broker-dealer is a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction. The term broker-dealer is used in U. A brokerage acts as a broker or agent when it executes orders on behalf of clients, whereas it acts as a dealer , or principal, when it trades for its own account. BREAKING DOWN 'Broker-Dealer' Broker-dealers fulfill several important functions in the financial industry; these include providing investment advice to customers, supplying liquidity through market-making activities, facilitating trading activities, publishing investment research and raising capital for companies.
Broker-dealers may range in size from small independent boutiques to large subsidiaries of giant commercial and investment banks. By definition, broker-dealers are buyers and sellers of securities, and they are also distributors of other investment products. As the name implies, they perform a dual role in carrying out their responsibilities. As brokers, they handle transactions, buying and selling securities on behalf of their clients. In their dual roles, they perform a couple of vital functions; they facilitate the free flow of securities on the open market, and they buy or sell securities in their own accounts to ensure there is a market in those securities for their clients.
In this regard, broker-dealers are essential, and they are also well-compensated, earning a fee on either or both sides of a securities transaction. Additionally, broker-dealers that are tied directly to an investment banking operation engage in the underwriting of securities offerings. They may also acquire a piece of the securities offering for their own accounts, and may be required to do so if they are unable to sell all of the securities. Once the underwriting process is completed and the securities are issued, the broker-dealers then become distributors, and their clients are typically the target of their distribution efforts.
In that effort, the financial advisors of the firms then act as brokers to solicit their clients and recommend the purchase of the security for their accounts. In this regard, the broker-dealers are facilitating the interests of the issuer, themselves in the collection of a distribution fee , and their clients, although their only contractual obligation is to the issuer.
Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. What is a 'Broker-Dealer' A broker-dealer is a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.
The Multiple Roles of a Broker-Dealer By definition, broker-dealers are buyers and sellers of securities, and they are also distributors of other investment products. Get Free Newsletters Newsletters.More...