Broker-Dealer
Broker-Dealer (B/D): A Broker is in the business of buying & selling securities on behalf of others. A Dealer does so on its own behalf.
BROKER
Also Known As: Agent
Act on Behalf of: Client
Compensation: Commission
Security Ownership?: No – just pairs up buy & seller
DEALER
Also Known As: Principal / Market Maker (MM)
Act on Behalf of: Its own firm
Compensation: Markup/down
Security Ownership?: Yes – buys/sells from its own inventory
Notes: In general, maintains an inventory and a firm bid & ask.
Designated Market Maker (DMM): Charged with maintaining a “fair & orderly market” in the stocks they quote. DMMs must quote at the national best-bid-or-offer (NBBO) a specified percentage of the time and facilitate price discovery throughout the day as well as at the open, close and in periods of significant imbalances and high volatility (like airline pilots).
My Take
Be wary of Brokers. They are Sales “Agents”, paid by commission, and they are not held to the same Fiduciary standard as Investment Advisors are held to. While Brokers are required to recommend “suitable” investments, they have many conflicts of interest given their commission-based compensation.
