Who does what: participants in a trade

Start with the service

A broker effects securities transactions for others. A dealer buys and sells for its own account as a regular business. A broker-dealer can perform both roles. On a stated trade, ask whether the firm acts as agent for the customer or as principal from its inventory; a commission or markup is a common charge for the role, not the statutory definition.

An investment adviser is in the business of providing securities advice for compensation, subject to the definition and its exclusions. A firm can offer both brokerage and advisory services. Identify the service described: a fee label alone does not determine the role. Advisers owe clients duties of care and loyalty.

Custody means holding and administering assets. In a holder-directed account, custody alone does not authorize investment choices. A transfer agent maintains the issuer’s registered-holder records and handles certificates and distributions. A central-counterparty clearing corporation clears accepted trades between member firms and guarantees their settlement under its rules.

Keep the records separate. The issuer register can show a nominee for street-name shares. The brokerage firm records the customer’s beneficial interest on its own books. A trade between customers or firms can change those positions while the nominee remains on the issuer register.

A trader buys and sells securities. The label alone does not establish dealer status: buying and selling for one’s own account is not enough without a regular business of dealing. A market maker is a dealer that holds itself out as willing to buy and sell a security for its own account on a regular or continuous basis. Quoting a trade is different from giving investment advice. One firm can perform several services.

Exam terms

Broker-dealer

A firm that can act both as a broker, for customers, and as a dealer, for its own account.

Broker (agent)

Effects securities transactions for the account of others.

Dealer (principal)

Buys and sells securities for its own account as a regular business.

Investment adviser

Provides securities advice as a business for compensation, subject to the definition and its exclusions.

Custodian

Holds and administers assets; custody alone does not grant investment-choice authority.

Transfer agent

Maintains the issuer’s registered-holder records and handles certificates.

Clearing corporation

Clears accepted member trades and, as central counterparty, guarantees settlement under its rules.

Worked example

An investor buys 300 shares in a cash account through a retail firm. The accepted trade settles, and the firm records the shares for the customer in street name.

1. The firm executes the customer’s order as agent and charges a commission in this example.
2. The trade is accepted for central-counterparty clearing. The clearing corporation stands between the member firms and guarantees settlement under its rules.
3. The broker records the customer’s beneficial interest. Street-name registration does not make the brokerage firm the beneficial owner.
4. The issuer register still shows the nominee. The transfer agent maintains that register; distributions and voting material reach the customer through the intermediaries.
5. If the firm instead sells from its own inventory as principal, the execution role changes. The separate clearing, issuer-record and beneficial-customer functions still need to be distinguished.

Follow the other participants

An introducing firm brings customer accounts to another firm under a carrying agreement. In a fully disclosed arrangement, the carrying firm safeguards customer funds and securities and is responsible for account statements. The agreement assigns duties such as accepting, transmitting and executing orders. A carrying or clearing broker serves customer accounts; a clearing corporation acting as central counterparty serves accepted member trades. They are not the same role.

A prime broker maintains a consolidated master account for a client whose trades are executed through several brokers. It coordinates the resulting positions and records. This is a customer-account service, not the issuer’s shareholder register, and it does not guarantee investment returns.

A municipal advisor can recommend the structure, timing or terms of a municipal securities issue to the municipal client. An underwriter distributes securities by buying for resale or selling for the issuer. These are separate services; general factual information is not automatically municipal advice, and legal exclusions and exemptions matter.

An issuer creates or proposes to issue securities. For example, a company issuing new shares is the issuer; the firm buying them for distribution is an underwriter. An underwriter need not buy every issue: some sell for the issuer. A holder selling existing shares does not create a new issue merely by selling.

A custodian holds and administers assets. In the self-directed account described here, the holder chooses investments. A trustee holds and manages assets for a beneficiary under the trust’s terms and applicable law. Read the authority granted: some trusts limit decisions or require consent, so the trustee label does not give unlimited power.

DTCC is a group whose subsidiaries include DTC and NSCC. DTC provides depository and book-entry settlement services. NSCC acts as central counterparty for accepted securities trades and nets obligations under its rules. Custody and book-entry movements are different from the central counterparty’s trade guarantee.

OCC, the Options Clearing Corporation, provides central-counterparty clearing and settlement for U.S. listed options and other supported derivatives. It is distinct from DTC and NSCC. Its settlement role does not insure an option’s market value or choose a customer’s investment.

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Related practice

• Regulator and participant role mapPractice this