Broker-Dealer

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

  1. Who are the Principals
  2. Who will be the CEO
  3. Who will be the CFO
  4. Will the entity be conducting business with the public?
  5. What kind of products will it deal with?
  6. Will the entity clear and settle trades on its own or use a third party clearing firm?
  7. Where will be the main office? How many branch offices?
  8. Who will be the SRO? Eg: NYSE

SEC issues the license after reviewing the application

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