Most securities firms function as both brokers and dealers, so they are referred to as broker-dealers.

A broker is any person engaged in the business of effecting transactions in securities for the account of others in exchange for a fee or commission (see Section 3(a)(4)(A) of the Exchange Act). A broker acts as an agent only for someone else, buying or selling securities on a securities exchange or over-thecounter for a commission.

A dealer is any person regularly engaged in the business of buying or selling securities for its own account (see Section 2(a)(12) of the Securities Act and Section 3(a)(5)(A) of the Exchange Act). Unlike a broker, who only acts as an agent for a customer in exchange for a commission, a dealer typically acts as a principal by dealing in securities for its own inventory as part of a regular business. A trader is not considered a dealer since it does not engage in transactions for its own account as part of a regular business.

Broker-dealers are subject to regulatory oversight by the SEC and must also be members of one or more self-regulatory organizations. Broker-dealers may also be subject to regulation under state blue sky laws. Large broker-dealers may act as clearing brokers and also offer prime brokerage services to private funds, including hedge funds.

For more information, see Practice Note, Broker-Dealer Registration Overview.

Broker-dealers are also often engaged in market making and trading in other financial products such as swaps and derivatives, including futures. When trading in swaps and other derivatives, they are often referred to in the market as swap providers. When engaging in transactions in exchange-traded futures, they may be acting as futures commission merchants (FCMs) or introducing brokers (IBs). When acting in any of these capacities, they are subject to regulation by the Commodity Futures Trading Commission (CFTC).

Broker-dealers are often members of exchanges, including swap exchanges, and are often clearing members of clearinghouses. Some major broker-dealers may be considered swap dealers under the Dodd-Frank Act (Dodd-Frank). Dealing in non-securities-based swaps will subject them to swaps regulations by the CFTC under Dodd-Frank.

Dealing in securities-based swaps will continue to be regulated under a separate category of registration with the SEC. For information on swaps and derivatives, see Practice Note, Derivatives: Overview (US). For information on the regulation of swap dealers, as well as swaps and derivatives generally, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives.