Broker-Dealer
Candlefocus EditorA broker-dealer is a type of institution that operates as both a broker and a dealer, depending on the situation. It goes by a few different names in different contexts. It is also referred to as a stockbroker, securities broker, investment banker, or financial advisor.
As a broker, the broker-dealer provides services that enables an individual or organization to buy or sell certain financial instruments. For example, if someone wants to buy stocks, they would use the services of a broker. As a dealer, the broker-dealer will typically buy and sell securities for its own account which it then sells to its customers.
In its role as a broker, the broker-dealer acts as an intermediary between buyers and sellers, typically charging a commission for its services. The broker is responsible for the accuracy of order execution, ensuring all transactions take place at the client's requested price and order size. Moreover, the broker-dealer must also provide clients with up-to-date research and financial advice. Many brokerage firms also offer additional capabilities such as asset management, financial planning, and IRAs.
In its role as a dealer, a broker-dealer will purchase and sell stocks, bonds, or other investments directly to and from the investor, usually acting as market maker. This means they buy at a certain price and then resell the security to investors at a different price. Dealer activities generally provide greater liquidity in the market, leading to a more efficient pricing environment.
Today, almost all large financial institutions are broker-dealers, including Wall Street Banks and major securities firms. Numerous smaller broker-dealers also exist and can provide more customized services to specific types of clients, such as retail investors or large institutions.
Broker-dealers are also increasingly being held to higher standards by regulators, who recently implemented the SEC's Regulation Best Interest. This requires broker-dealers to act in the best interests of their clients, that there is disclosure of all material facts related to their transactions, and that there is a duty of care exercised in selecting investments.
The broker-dealer plays a key role in the financial system. It is a financial entity that facilitates the buying and selling of securities on behalf of clients, and provides investors with access to research, advice, and information to help them make informed decisions. This makes it an essential part of the market structure and an integral part of the investing process.