If you work for a US Bank in the capital markets domain, you would come across this term almost everyday. Who is a Broker-Dealer? A Broker-Dealer could be a person or a firm involved in buying and selling securities. I had the opportunity to work for Pershing LLC where this term was commonly used for firms. So I’ll use firms for explanation.
Broker: A firm which buys and sells securities for a client but never trades against the client is a broker. Lets say FinFin LLC only deals with buying and selling of securities for its clients, its a Broker.
Dealer: A firm which positions a security and trades against the public is called a Dealer. Lets say FinFin LLC has its own securities and trades against the public, its a Dealer.
Broker-Dealer: A firm that trades securities and positions its own security against the public is a broker-dealer. Lets say FinFin LLC deals with buying and selling securities for its clients and also trades FinFin LLC Securities for its clients and the public, its a Broker-Dealer.
A broker-dealer should have a license from Securities Exchange Commission(SEC). A 40-page application needs to be submitted to the SEC to become a Broker-Dealer. The application consists of Business and Personal questions like
- Who are the Principals
- Who will be the CEO
- Who will be the CFO
- Will the entity be conducting business with the public?
- What kind of products will it deal with?
- Will the entity clear and settle trades on its own or use a third party clearing firm?
- Where will be the main office? How many branch offices?
- Who will be the SRO? Eg: NYSE
SEC issues the license after reviewing the application