Broker-dealer
Also known as: bd, brokerage firm
A broker-dealer is a firm that buys and sells securities for customers (as a broker) or for its own account (as a dealer). Most brokerage firms act in both capacities, which is why the two roles share one label.
A broker-dealer is a person or firm in the business of effecting securities transactions. The hyphenated name reflects two distinct roles: acting as a broker means executing trades on behalf of customers in an agency capacity and earning a commission, while acting as a dealer means trading for the firm's own account in a principal capacity and earning a markup or markdown. Because most firms do both — routing some customer orders to the market and filling others from their own inventory — regulators treat "broker-dealer" as a single registration category.
Broker-dealers sit at the center of the securities industry. They underwrite new issues, make markets in stocks and bonds, maintain customer brokerage accounts, and employ the registered representatives who recommend investments to the public. In the United States, broker-dealers register with the SEC, join FINRA, and register in each state where they do business.
The dual role creates a conflict of interest that regulation addresses head-on: a firm must disclose on each trade confirmation whether it acted as agent or principal, and it cannot charge both a commission and a markup on the same trade.
The precise definition of a broker-dealer — and who is excluded from it — is a core testing point on the Series 63, Series 65, and Series 66 exams. Under the Uniform Securities Act, agents, issuers, and banks are excluded from the definition, and firms with no place of business in a state that deal only with institutions or existing customers passing through may be exempt from registering in that state.
Key takeaways
- A broker-dealer trades securities for customers (broker, agency capacity) and for its own account (dealer, principal capacity).
- Brokers earn commissions; dealers earn markups or markdowns — never both on a single trade.
- Broker-dealers register with the SEC, FINRA, and the states where they conduct business.
- The Uniform Securities Act excludes agents, issuers, and banks from the broker-dealer definition — a frequent exam question on the Series 63, 65, and 66.