What is a Broker-Dealer?

A broker-dealer is a person or a company buying and selling securities for their account or their customers. In US securities regulation parlance, broker-dealers are known as stockbrokers since a majority of them act as agents and also principals. They act as brokers or agents by carrying out orders on behalf of the client and serve as dealers or principals by trading for their account.

What Does a Broker-Dealer Do? 

The broker-dealers have various essential functions in the finance industry which are:

• Supplying liquidity through market making activities
• Raising capital for companies
• Providing customers with sound investment advice
• Facilitating trading activities
• Publishing investment research

Broker-dealers come in different sizes ranging from large commercial and investment banks to small independent boutiques. They buy and sell securities as well as distribute other investment products. Their dealer function involves initiating transactions on behalf brokerage firms while their broker function entails handling transactions arising from trading securities on behalf of their clients The broker-dealers ensure a free flow of securities in the open market while still trading the securities in their accounts to create a securities market for their clients. This means that they are essential in the market. They also earn a significant amount because they are paid a fee on both sides of a securities transaction. The Broker-dealers who are involved in the underwriting of securities offerings are the one directly tied to investment banking operations. Broker-dealers can act as agents of securities companies by either being the principal underwriters of stock or bond offerings or being members of the underwriting syndicate. When broker-dealers act as agents, they enter into a contractual agreement with the issuer by serving on a firm's commitment. This commitment obligates them to distribute a specific amount of the securities offered to the public in exchange for an underwriting fee. They may acquire a portion of the securities offering for their accounts and may be required to do so in a situation where they are not able to sell all the securities. After the completion of the underwriting process and the issue of all the securities, the broker-dealers become distributors, and their efforts are targeted at their clients. The financial advisors of the firms start acting as brokers to convince their clients and recommend the purchase of the security for their accounts. This means that the broker-dealers facilitate the interests of the issuer, their clients, and themselves even though their contractual obligation is only to the issuer