Broker Dealers

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Broker Dealer Overview

The different types of broker-dealers in the US include clearing brokers, introducing brokers, investment brokers, market markers, floor brokers, discount brokers, wirehouse broker-dealers, independent broker-dealers, among others.

Types of Broker-Dealers

  • According to Investopedia, a broker-dealer is a person or a firm that buys and sells securities on behalf of its customers or for itself.
  • Broker-dealers come in many different types with have different revenue streams, and sell different securities.
  • According to WithumSmith+Brown, broker-dealers in the US are distinguished by the securities they sell, their revenue streams, and the roles they play in the US financial industry.
  • Wall Street Mojo, on the other hand, categorizes broker-dealers according to their mode of operation.
  • There is a wide variety of broker-dealers, but the most common ones are introducing brokers, clearing brokers, investment brokers, market makers, floor brokers, discount brokers, and high-frequency traders.

1. Clearing Brokers

  • A clearing broker is the only type of broker-dealer that has the authority to clear transactions. Clearing transactions and trades is complex since it requires insane capital and is infrastructure-intensive.
  • Because of this reason, most broker-dealers do not clear their trades or hold customer accounts but seek the services of a clearing broker.
  • A clearing broker's role is to ensure that transactions are completed successfully and all the trades settled. The clearing broker gets the green light upon the execution of an order to work with a clearing corporation to complete the transaction and ensure that all funds are transferred properly.
  • According to experts, clearing brokers are the most vital component of the securities market since their services improve the reliability and efficiency of the system, thus simplifying it for investors.
  • In addition to clearing trades, clearing brokers are also charged with research to verify the reliability and accuracy of the information they are given, and they also manage the transaction's funds.

2. Introducing Brokers

3. Investment Brokers

4. Market Markers

  • According to WithumSmith+Brown, "market makers are a unique type of broker-dealers that assist in stabilizing the market by providing liquidity."
  • Market makers shoulder "the risk of holding a certain number of shares of a certain security to facilitate the trading of that particular security."
  • Market markers decide on the buy and sell price of the securities in their inventory so that they can profit from it.
  • Market markers are multi-pronged, i.e., they sell stocks on major stock exchanges and also in over-the-counter markets. Market markers cushion themselves from market fluctuations by maintaining "a spread on each stock, which is the difference between the price the market maker is willing to buy a security for and the price it is willing to sell it for."
  • The spread is the potential profit they can take home, and it compensates market markers for the business risks they take.

5. Wirehouse Broker-Dealers

  • Wall Street Mojo distinguishes broker-dealers from their mode of operation.
  • The wirehouse broker-dealer has a large-scale operation and has its own set of products which they further sell to their customers.

6. Independent Broker-Dealers

  • These broker-dealers act like agents where they sell products they procure from outside and earn from certain margins or commissions.

Roles and Functions of Broker-Dealers in the US

Tips When Looking for a Broker-Dealer

  • Apart from the obvious factors of consideration, such as financial strength and regulatory compliance, other factors to look for when choosing a good broker-dealer include:
    • Use the FINRA BrokerCheck system to find out if the broker has a criminal history or any allegations of misconduct against them.
    • Listen to your gut feeling and only work with a broker-dealer you like, admire, and trust.
    • Work with broker-dealers that understand your needs, preferences, and values.
    • The broker-dealer's documents should be clear and transparent.

Typical Partnerships

Important Broker-Dealer Regulations in the US

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Top Broker Dealers

The top three US broker dealers based on revenue are Fidelity Investments, Charles Schwab, and Edward Jones. The details are outlined below.

Fidelity Investments

Charles Schwab

Edward Jones

Research Strategy

Beginning our research to find the top US broker dealers, we visited business rating websites, including Investopedia, Top Rated Firms, and Financial Planning. In doing so, we came up with a list of fifteen companies, eight of which were present on all lists evaluated. Taking the eight companies present on each evaluated list, we ensured only the top dealers were selected. From these eight, we used the three broker dealers who had the highest 2019 revenue. We took the revenues from news organization website Reuters, as well as the 2019 annual report for the companies, found on their websites. An overview of the products and services of each company was found on their respective websites. This was also true of their partnerships. Other partnership information was provided by industry websites Wealth Management, and Institutional Real Estate Inc., as well as company websites of ESPN, and the US Ski and Snowboard.