Broker-dealer
Encyclopedia
A broker-dealer is a term used in United States
financial services
regulations. It is a natural person, a company or other organization that trades securities
for its own account or on behalf of its customers.
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial bank
s, investment banks or investment companies
.
When executing trade orders on behalf of a customer, the institution is said to be acting as a 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 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. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority
(FINRA), a self-regulatory organization
. Many states also regulate broker-dealers under separate state securities laws (called "blue sky laws").
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 trader
and subject to different requirements.
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. Many commentators have cited this rule change as an important cause of the financial crisis that began in 2007. The rule change remains in effect, though subject to modifications.
to refer to businesses involved in the purchase and sale of securities for the account of others.
The Financial Services Authority
authorises and regulates companies engaging in such activity as "regulated activities" under the Financial Services and Markets Act 2000
.
ese term for a broker-dealer is . Securities companies are regulated by the Financial Services Agency
under the Financial Instruments and Exchange Law. The "big three" are Nomura Holdings
, Daiwa Securities Group
and Nikko Cordial
(a subsidiary of Sumitomo Mitsui Financial Group). Most major commercial bank
s in Japan also maintain broker-dealer subsidiaries
, as do many foreign commercial banks and investment banks.
Securities companies must be organized as kabushiki kaisha
with a statutory auditor
or auditing committee, and must maintain minimum shareholder equity of ¥
50 million.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
regulations. It is a natural person, a company or other organization that trades securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
for its own account or on behalf of its customers.
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
s, investment banks or investment companies
Investment company
An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses....
.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
. 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.
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 prices validity.
Functions
- All the functions of brokerInvestment brokerInvestment brokers are individuals who bring together buyers and sellers of investments. They need a license to operate. They act on behalf of buyers and sellers of stock...
including financial consulting - Organization and support of turnover (liquidity), or so-called 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)
United States
- See: Securities regulation in the United StatesSecurities regulation in the United StatesSecurities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities...
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, broker-dealers are regulated under the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
by the Securities and Exchange Commission (SEC), a unit of the U.S. government. Some regulatory authority is further delegated to the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA), a self-regulatory organization
Self-regulatory organization
A self-regulatory organization is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and...
. Many states also regulate broker-dealers under separate state securities laws (called "blue sky laws").
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 trader
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
and subject to different requirements.
On April 28, 2004, the SEC voted unanimously to change the net capital rule
Net capital rule
The uniform net capital rule is a rule created by the U.S. Securities and Exchange Commission in 1975 to regulate directly the ability of broker-dealers to meet their financial obligations to customers and other creditors...
which applies to broker-dealers, thus allowing those with "tentative net capital" of more than $5 billion to increase their leverage ratios. Many commentators have cited this rule change as an important cause of the financial crisis that began in 2007. The rule change remains in effect, though subject to modifications.
United Kingdom
UK securities law uses the term intermediaryIntermediary
An intermediary is a third party that offers intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer...
to refer to businesses involved in the purchase and sale of securities for the account of others.
The Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
authorises and regulates companies engaging in such activity as "regulated activities" under the Financial Services and Markets Act 2000
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
.
Japan
The common JapanJapan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
ese term for a broker-dealer is . Securities companies are regulated by the Financial Services Agency
Financial Services Agency
The is a Japanese government organization responsible for overseeing banking, securities and exchange, and insurance in order to ensure the stability of the financial system of Japan. The agency operates with a commissioner and reports to the Minister of Finance. It oversees the Securities and...
under the Financial Instruments and Exchange Law. The "big three" are Nomura Holdings
Nomura Holdings
Nomura Holdings, Inc. is a Japanese financial holding company, and a principal member of the Nomura Group.In October 2008 the company acquired Lehman Brothers Holdings's investment banking and equities unit in Asia and Europe and kept on most of its employees. Nomura paid $225 million for the...
, Daiwa Securities Group
Daiwa Securities Group
is Japan's second largest securities brokerage after Nomura Securities Co..Major group members include Daiwa Securities Co.Ltd., which offers retail services such as online trading to individual investors and Daiwa Securities Capital Markets Co.Ltd...
and Nikko Cordial
Nikko Cordial
was a third largest Japanese brokerage firm and the holding company for Nikko Cordial Securities and subsidiaries. In 2008, Nikko Cordial Corporation became a wholly owned subsidiary of Citigroup Inc., upon completion of share exchange and it merged with Citigroup Japan Holdings Ltd. to form Nikko...
(a subsidiary of Sumitomo Mitsui Financial Group). Most major commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
s in Japan also maintain broker-dealer subsidiaries
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
, as do many foreign commercial banks and investment banks.
Securities companies must be organized as kabushiki kaisha
Kabushiki kaisha
is a type of business defined under Japanese law.-Usage in language:Both kabushiki kaisha and the rendaku form kabushiki gaisha are used. The "K" spelling is much more common in the names of companies and in English-language legal literature, whereas the "G" pronunciation is dominant in...
with a statutory auditor
Statutory auditor
A is an official found in Japanese kabushiki kaisha .Statutory auditors are elected by shareholders and hold a position in the hierarchy alongside the board of directors. A kabushiki kaisha must have at least one statutory auditor, unless the transfer of shares is restricted in the articles of...
or auditing committee, and must maintain minimum shareholder equity of ¥
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
50 million.
See also
- BrokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
- Brokerage firmBrokerage firmA brokerage firm, or simply brokerage or broker in context, is a financial institution that facilitates the buying and selling of financial derivatives between a buyer and a seller...
- Trader (finance)Trader (finance)A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
- Stock brokerStock brokerA stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
- Commodity brokerCommodity brokerA commodity broker is a firm or individual who executes orders to buy or sell commodity contracts on behalf of clients and charges them a commission. A firm or individual who trades for his own account is called a trader. Commodity contracts include futures, options, and similar financial...
- Options brokerOptions brokerOptions brokers specialize in offering options trading, research, education and other tools to individual investors. In addition to common options trades like covered calls, option spreads, and straddles, many options brokerages offer trading in products related to options, including stocks, ETFs,...
- Floor brokerFloor brokerA floor broker is an independent member of an exchange who can act as a broker for other members who become overloaded with orders, as an agent on the floor of the exchange. The floor broker receives an order via Teletype machine from his firm's trading department and then proceeds to the...