is an individual or company that buys and sells securities for its clients and for itself. Broker-dealers differ from plain-vanilla, which can only buy and sell for their clients. Most brokerage firms are broker-dealers.
A broker-dealer can execute trades for its own account, not just for a clients account. When the broker-dealer is buying or selling securities for its own account, it is acting as aprincipal.
If the broker-dealer is amarket makerin a particularstock, sometimes the broker-dealer is required to purchase stock that the client is selling. It is required to do this because the market makers job is to facilitateliquidityfor that particular security. In some cases, the broker-dealerwillsimply sell this stock to another buyer and make a smallprofit, or it might keep thesharesin its private portfolio.
For example, if you are interested in selling your shares of Company XYZ, which hardly ever have any buyers, abrokerwould effect the transaction for you if it had a readily available buyer. But a broker-dealer would effect the transaction even if it had to buy your shares and hold them in its own portfolio for a while — especially if the broker-dealer were a market maker in Company XYZ stock and was responsible for making sure Company XYZ stock was tradeable.
TheSecurities and ExchangeCommission(SEC), The Financial Industry Regulatory Authority and the exchanges are responsible for licensing and regulating the activities of broker-dealers. Broker-dealers who physically operate within the United States must register with the SEC even if their activities are directed only to foreign investors outside the United States.
Broker-dealers are incredibly important because they facilitateliquid– and thus efficient — markets. Without them, buyers and sellers would have trouble finding each other, transactions would be more cumbersome to complete and inactivestockswould become even harder if not impossible to trade.
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