Definition of ‘Dealer’
A person or firm in the business of buying and selling securities for their own account, whether through a broker or otherwise. A dealer is defined by the fact that it acts as principal in trading for its own account, as opposed to a broker who acts as an agent in executing orders on behalf of its clients. A dealer is also distinct from a trader in that buying and selling securities is part of its regular business, while a trader buys and sells securities for his or her own account but not on a business basis.
Apart from buying and selling securities, a dealer also makes markets in securities, underwrites securities and provides investment services to investors. Most dealers also act as brokers, and are therefore known as broker-dealers. Broker-dealers range in size from small independent houses to subsidiaries of the largest banks.
The Securities and Exchange Commission (SEC) requires that all brokers and dealers generally register with it, and also be members of the Financial Industry Regulatory Authority (FINRA). The SEC requires that individuals who engage in the following activities may need to register as a dealer:
- Someone who holds himself/herself out as being willing to buy and sell a specific security on a continuous basis, i.e. is making a market in that security;
- A person who runs a matched book of repurchase agreements; or
- An individual who issues or originates securities that he or she also buys and sells.
The SEC requires dealers to perform certain duties in their dealings with clients. These duties include prompt order execution, disclosure of material information and conflicts of interest to investors, and charging prices that are reasonable in the prevailing market.
In recent years, the profitability of dealers has been challenged by a number of factors, including the heightened regulatory environment (which has increased compliance costs), increasing technology requirements to keep up with rapidly changing markets, and industry consolidation.