Trading in the stock market used to be something only professionals and business people did on the busy floors of stock exchanges. Now, things have changed. Anyone with internet access can find an online broker and start trading in different markets, like stocks and bonds, all from their computer or phone.

Broker-dealers are key players in this change. They are like agents who do the trading for you, working in various stock markets and taking a fee or commission for their services. They make it easy for everyday people to buy and sell stocks without needing to be physically present in the stock market or actually holding the stocks themselves. Understanding how broker-dealers work is important if you’re thinking about getting into trading, as they are the ones who help you make your trades in these financial markets. Let’s explore in detail what broker-dealers do and how they help you with trading.

What Is a Broker-Dealer?

A broker-dealer is a key figure in the financial markets, often functioning as either an individual or a financial institution that serves numerous clients. The term ‘broker-dealer’ derives from the dual roles these entities play: as brokers, they provide brokerage services to investors, helping them buy and sell securities such as stocks and bonds; as dealers, they trade securities on their own behalf, participating actively in the markets to serve their own financial interests.

In essence, broker-dealers are indispensable participants in the financial markets, balancing their responsibilities to their clients, which may involve offering prop trading white label services, with their activities as independent market players. This multifaceted role contributes to both individual financial growth and the robustness of the market system.

How Does a Broker-Dealer Work


Examples of broker-dealers range from large, well-known financial institutions to smaller, specialized firms. Prominent examples include Goldman Sachs, Morgan Stanley, and Merrill Lynch. These institutions offer a wide range of services, including stock and bond trading, investment banking, advisory services, and wealth management. There are also many smaller, independent broker-dealers that may focus on specific market niches or cater to a particular type of client. 

Regardless of size, all broker-dealers are bound by the same regulatory framework that governs their operations, ensuring they act in the best interests of their clients and the market. These entities play a critical role in the financial system, facilitating transactions, providing liquidity, and helping investors access a wide range of securities and investment opportunities.

How Do Broker-Dealers Work?

Broker-dealers operate within the financial markets by performing two main functions: as brokers and as dealers, each playing a distinct but complementary role.

As a broker 

When functioning as a broker, a broker-dealer acts as an intermediary between an investor and the securities market. This role involves taking orders from clients and executing these orders in the market. Broker-dealers must strive to get the best execution for their clients’ orders, meaning they must aim to execute trades at the most favorable terms available given the current market conditions. 

The services provided by a broker might include offering advice on which stocks to buy or sell, providing insights into market trends, and helping clients formulate their investment strategies. Brokers typically earn revenue through commissions or fees charged on each trade they execute on behalf of their clients. These fees can be structured in various ways, depending on the level of service and the type of transaction.

As a dealer

In their role as dealers, broker-dealers are essentially market makers. They engage in buying and holding a portfolio of securities and then selling these securities to clients looking to make a purchase or buying securities from clients looking to sell. The dealer makes a profit primarily through the bid-ask spread, which is the difference between the price at which they buy securities (the bid) and the price at which they sell them (the ask). 

This trading for their own account involves a certain level of risk, as the value of the securities in the dealer’s inventory can fluctuate based on market conditions. Effective risk management is therefore a critical component of operating as a dealer. By providing liquidity and facilitating trades, dealer activities contribute significantly to the efficiency and stability of the financial markets.

How Does a Broker-Dealer Work

2 Types of a Broker-Dealer

Broker-dealers in the financial markets can be categorized broadly into two distinct types: Wirehouses and Independent Broker-Dealers. Each type operates with a different business model and serves clients in unique ways.


Wirehouses are large, national brokerage firms that offer a wide range of financial services, including brokerage services, investment banking, asset management, and financial advisory services. These firms typically have a large base of financial advisors and extensive branch networks across the country. Examples of wirehouses include well-known names like Morgan Stanley and Merrill Lynch. 

Wirehouses usually offer their own financial products and services, and their advisors may be encouraged to prioritize these in-house products when making recommendations to clients. They are known for their comprehensive services, substantial resources, and established market presence, but they might have higher fees and less flexibility in terms of personalized service compared to independent broker-dealers.

Independent Broker-Dealer

Independent Broker-Dealers, on the other hand, operate differently. These firms allow financial advisors to operate independently, offering more autonomy in terms of the products and services they can offer to clients. Unlike wirehouses, independent broker-dealers typically do not produce their own financial products. This independence can lead to a broader range of investment options for clients, as advisors are not limited to recommending in-house products. 

Independent broker-dealers are often preferred by advisors who seek more control over their business practices and client relationships. They can provide more tailored services to clients, but they may lack the extensive support structure and resources that larger wirehouses offer.

In summary, broker-dealers are essential to helping people trade stocks and bonds in the financial markets. They work in two main ways: as brokers, they help clients buy and sell investments and give useful advice; as dealers, they buy and sell for their own company’s gain, which helps keep the market active. This dual role allows them to meet the needs of different investors and keep trading running smoothly. Whether they are big firms with lots of resources (wirehouses) or smaller, independent companies that offer more personalized services, broker-dealers play a crucial role in making sure the stock market works well for everyone involved.