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What is a broker-dealer?

Broker-dealer definition

The financial industry defines a broker-dealer as an individual, a company or other institution that is engaged in securities trading on behalf of its customers or for its own account.

Although many broker-dealers represent independent firms engaged in broker-dealer services, many of them are subsidiaries of large investment companies and commercial banks.

Broker-dealer meaning.

The term broker-dealer is often used to define a stock brokerage, because the majority of them operate as agents selling or buying securities. Executing orders on behalf of its customers, a brokerage acts as a broker. When it trades for its own account, a brokerage acts as a dealer.

Broker-dealers perform a number of important functions in the financial sector. They provide financial consultancy for customers, provide liquidity through market-making activities, raise capital for companies and publish investment research. 

Broker-dealers can be different in size, from small independent firms to large investment banks. 

Types of broker-dealers.

There are thousands of broker-dealers, but generally they can all be divided into two big categories: independent broker-dealers, which sell products from external sources, and wirehouses, which sell their own products. 

  • A wirehouse is a non-independent broker, working for a wirehouse company, or a firm with many branches such as a national brokerage house. Today, the four largest and most famous full-service wirehouse brokerages include UBS, Morgan Stanley, Bank of America’s Merrill Lynch and Wells Fargo. 

  • An independent broker-dealer is a company registered and licensed as required by law in order to sell securities to the general public. Independent broker-dealers give their brokers almost full freedom in how they conduct their business. Independent broker-dealers were created to accommodate financial advisors with security licenses who needed back-office support for trade execution and compliance services. These companies are interested in more experienced advisors who can generate high revenue streams from a sophisticated client base. 

In general, broker-dealers are considered as buyers and sellers of securities. They also operate as distributors of different investment products. Performing a dual role, they act on behalf of a brokerage firm as dealers, starting transactions for the company’s own account. As brokers, they buy and sell securities on behalf of their clients. These activities help to facilitate the flow of securities on the open market. Therefore, broker-dealers are considered an essential part of financial markets, also well-paid, as they earn a fee on both or either side of a transaction.

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