View source for Finance:Broker-dealer

{{Short description|One who engages in the business of trading securities on behalf of their customers}}
In [[Finance:Financial services|financial services]], a '''broker-dealer''' is a [[Social:Natural person|natural person]], company or other organization that engages in the business of trading [[Finance:Security|securities]] for its own account or on behalf of its customers.  Broker-dealers are at the heart of the securities and [[Finance:Derivatives market|derivatives]] trading process.<ref>Lemke and Lins, ''Soft Dollars and Other Trading Activities'' (Thomson West, 2013-2014 ed.).</ref>

Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of [[Finance:Commercial bank|commercial bank]]s, [[Finance:Investment bank|investment bank]]s or [[Finance:Investment company|investment companies]].

When executing trade orders on behalf of a customer, the institution is said to be acting as a '''[[Finance:Broker|broker]]'''. 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 shares.<ref>Lemke and Lins, ''Mutual Fund Sales Practices'' (Thomson West, 2013).</ref>

== 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 [[Finance:Stockbroker|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 [[Finance:Price discovery|price discovery]] and execution between dealers.<ref>[http://chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_3_over_the_counter_derivatives.pdf Understanding derivatives]</ref>

==Regulation==
===United States===

In the United States, 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 {{USC|15|78o}}), with a number of exceptions, are required to be members of the Securities Investor Protection Corporation (SIPC) (pursuant to {{USC|15|78ccc}}) and are subject to its regulations. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority (FINRA), a [[Finance:Self-regulatory organization|self-regulatory organization]]. Many states also regulate broker-dealers under separate state securities laws (called "blue sky laws").<ref>{{cite web|url=http://www.nasaa.org/Industry___Regulatory_Resources/Broker_Dealers/|title=NASAA Broker-Dealer Resources|website=nasaa.org|access-date=6 April 2018|archive-url=https://archive.today/20050201134500/http://www.nasaa.org/Industry___Regulatory_Resources/Broker_Dealers/|archive-date=2005-02-01|url-status=dead}}</ref>

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 [[Finance:Trader|trader]] and subject to different requirements.<ref>[https://www.sec.gov/divisions/marketreg/bdguide.htm Guide to Broker-Dealer Registration], Division of Trading and Markets, U.S. Securities and Exchange Commission, April 2008.</ref>  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.<ref>Lemke and Lins, ''Soft Dollars and Other Trading Activities,'' §9:3 (Thomson West, 2013-2014 ed.).</ref>

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.<ref>[https://web.archive.org/web/20040724064149/http://www.gao.gov/decisions/majrule/d04896r.pdf General Accounting Office, Major Rule Report: Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities] (B-294184), June 25, 2004. (“GAO Major Rule Report”)</ref>   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.<ref>Lemke and Lins, ''Regulation of Investment Advisers'', §§1:19 - 1:21 (Thomson West, 2013).</ref>

Many broker-dealers also serve primarily as distributors for mutual fund 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).<ref>Lemke and Lins, ''Mutual Fund Sales Practices'' (Thomson West, 2013 ed.).</ref>  The forms of compensation may be sales loads from investors, or Rule 12b-1 fees or servicing fees paid by the mutual funds.<ref>Lemke, Lins and Smith, ''Regulation of Investment Companies'', §7.05 (Matthew Bender, 2013 ed.).</ref> There are several online portals that offer broker dealer assistance and search capabilities.

===United Kingdom===
UK securities law uses the term '''[[Social:Intermediary|intermediary]]''' 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"<ref>[http://www.opsi.gov.uk/acts/acts2000/ukpga_20000008_en_38#sch2 Financial Services and Markets Act 2000, schedule 2]</ref> under the Financial Services and Markets Act 2000.

===Japan===
The common {{wipe|Japan}}ese term for a broker-dealer is {{nihongo|"securities company"|証券会社|shōken-gaisha}}. Securities companies are regulated by the Financial Services Agency under the Financial Instruments and Exchange Law. The "big five" are [[Company:Nomura Holdings|Nomura Securities]], [[Company:Daiwa Securities Group|Daiwa Securities]], SMBC Nikko Securities, [[Company:Mizuho Securities|Mizuho Securities]], and [[Company:Mitsubishi UFJ Securities|Mitsubishi UFJ Securities]]. Most major [[Finance:Commercial bank|commercial bank]]s in Japan also maintain broker-dealer [[Social:Subsidiary|subsidiaries]], as do many foreign commercial banks and [[Finance:Investment bank|investment bank]]s.

Securities companies must be organized as kabushiki kaisha with a [[Finance:Statutory auditor|statutory auditor]] or auditing committee, and must maintain minimum [[Finance:Equity|shareholder equity]] of [[Finance:Japanese yen|¥]]50 million.

===Largest dealer banks===
*[[Company:BofA Securities|Bank of America Merrill Lynch]]
*[[Company:Barclays|Barclays]]
*[[Company:BNP Paribas|BNP Paribas]]
*[[Company:Citigroup|Citigroup]]
*[[Company:Credit Suisse|Credit Suisse]]
*[[Company:Deutsche Bank|Deutsche Bank]]
*[[Company:Goldman Sachs|Goldman Sachs]]
*[[Company:HSBC|HSBC]]
*[[Company:JPMorgan Chase|JPMorgan Chase]]
*Morgan Stanley
*[[Company:Nomura Holdings|Nomura]]
*[[Company:Commerzbank|Commerzbank AG]]
*[[Company:Société Générale|Societe Generale]]
*The Royal Bank of Scotland
*[[Company:UBS|UBS]]
*Wells Fargo
*[[Company:BNY Mellon|Bank of New York Mellon]]

==See also==
* [[Finance:Broker|Broker]]
* Securities market participants (United States)
* [[Finance:Trader|Trader]]
* [[Finance:Stockbroker|Stockbroker]]
* [[Finance:Commodity broker|Commodity broker]]
* Mutual fund
* [[Finance:Floor broker|Floor broker]]

==References==
<references />

==External links==
* [https://web.archive.org/web/20140720080558/http://chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_3_over_the_counter_derivatives.pdf Understanding Derivatives: Markets and Infrastructure - Chapter 3, Over-the-Counter (OTC) Derivatives] Federal Reserve Bank of Chicago, Financial Markets Group

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[[Category:Financial markets]]
[[Category:Fixed income]]

{{Sourceattribution|Broker-dealer}}