What is a broker-dealer?

Key Takeaways

so far in this series we have seen that markets are about supply and demand we know that supply is also known as sellers or sells we can also see it as askers or asks and we know that demand is known as buyers or buys we can also see it as bidders or bids we organize supply and demand using order books order books have two sides the by side and the sell side this organization is carried out by exchanges exchanges organize markets by creating and maintaining order books exchanges facilitate trading by providing access to these order books as traders begin trading against these order books transactions are generated in exchanges make these transactions available to all traders this data is the data that we see when we look at historical charts in prices these three concepts give us layers within the marketplace we are stacking these layers building a marketplace stack our task is to find our place as traders within this stack to introduce our next concept I want to consider our last concept exchanges we know that exchanges facilitate trading for traders so let's attempt to do just that with the new york stock exchange before trading begins we need to have an account this account is where all of our balances and transactions are maintained so I'm here on the new york stock exchange website on the membership page of the NYC NYC equities membership provides the high tech solutions needed to make rapid automated in anonymous executions membership brings access to opening and closing auctions and direct connectivity this brings us to our next concept broker dealers this is because the NYC provides these services this direct connectivity to broker dealers membership is available to registered and new us-based broker dealers individual investors are not eligible this isn't always going to be the case but most of the time traders are going to trade using a broker our main focus here is going to be brokers just for that reason however we will also touch on dealers as well to focus our discussion have a of resources to lead us to a definition of a broker-dealer I'm here on the US Securities and Exchange Commission's website in the guide to broker dealer registration section I want to look first at section 7 financial responsibility of broker dealers broker dealers must meet certain financial responsibilities requirements including maintaining minimum amounts of liquid assets or net capital next we have taking certain steps to safeguard the customer funds and securities so this implies that the broker is going to be in custody of or have customer funds and securities so they hold those particular funds and securities for investors and traders next we have making and preserving accurate books and records we saw that exchanges facilitate trading and we are now seeing that broker dealers provide account management services and record-keeping services for traders accounts when we trade we usually open an account with a broker we tell the broker what trades we would like to do and the broker executes these trades through an exchange on our behalf on the back end the broker may even use multiple exchanges to execute our trade on the front end the broker keeps track of our balances and our transactions now let's move to section 2 who is required to register as a broker dealer we can see that a broker is defined as any person engaged in the business of effecting transactions in securities for accounts of others brokers execute trades for traders in the old days potentially movies or you might have experienced this yourself you would call your broker on the phone and you would say buy this or sell that many shares of a particular stock now we typically have online brokers where they're still brokering for us but it's a software relationship we tell the software which trades we want to execute and the software goes ahead and keep track of our balances and transactions a dealer is any person engage in the business of buying and selling securities for his own account through a broker or otherwise it's important to note that a dealer typically operates as a business the definition of a dealer does not include a traitor a trader is a person who buys and sells securities for his or her own account either individually or through a fiduciary capacity but not as a part of a regular business a fiduciary capacity is when you are trading for someone else you're responsible for their funds but not as a business this could be a friend or a family member in many cases entities that operate as a broker also engage in dealing many online brokers that we're used to like interactive brokers or TD Ameritrade also tray for their own accounts dealing in a particular asset is usually part of a proprietary trading arm or market making activities these concepts are to come now with stocks we are used to saying that we trade with a broker however with crypto currencies we more often hear trade with an exchange so what I want to do now is have a look at G decks and figure out if GX is an exchange a broker or potentially both on the GX home page they tell us that GX is an exchange however we can see here they also give us the ability to open an account this means that account holders at the moment are dealing directly with an exchange and not a broker this was not the case with in with the nyu c we saw that in order to create an account or get a membership with the new york stock exchange you had to have a broker dealer license now looking here on the G Dax coinbase User Agreement in Section 3.4 we can see that GX is not a broker they specifically tell us in the User Agreement they are not a broker no investment of vice or brokerage section 3.4 for the avoidance of doubt coinbase does not provide investment tax or legal advice nor does coinbase broker trades on your behalf all G Dax trades are executed automatically based on the parameters of your order instructions and in accordance with the with posted trade execution procedures so they are specifically telling us that this is an exchange not a brokerage they're not giving us an advise all they're doing is facilitating the ability to trade we are fully responsible for understanding the implications of our actions while using the exchange now as the crypto currency markets mature we may see brokers popping up providing additional services to customers perhaps using multiple exchanges as a back-end but for now you want to trade Oh currencies most of your options until actually using an exchange directly if brokers start popping up you may see more strict requirements for actually using an exchange directly but for now this is what we have with this working knowledge we are ready to provide a definition for a broker dealer a broker dealer is an institutional trading entity that trades on behalf of individual traders when acting as a broker and on behalf of itself when acting as a dealer hope this video was helpful please like the video subscribe and support this 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