Broker-Dealer
A financial firm registered with the SEC that executes securities trades on behalf of clients (broker capacity) and may also trade securities for its own account (dealer capacity).
What is Broker-Dealer?
A broker-dealer is a person or firm that is in the business of buying and selling securities. When acting as a broker, the firm executes trades on behalf of clients and earns a commission. When acting as a dealer, it buys and sells securities for its own account (proprietary trading) and profits from the spread between bid and ask prices. Most large financial firms — including Goldman Sachs, Morgan Stanley, and Merrill Lynch — operate as broker-dealers under both capacities. Broker-dealers must register with the SEC, join a self-regulatory organization (typically FINRA), and maintain minimum net capital requirements to protect client assets. They are subject to Regulation Best Interest (Reg BI), which requires them to act in the best interest of retail customers when making recommendations. Broker-dealers differ from investment advisers: advisers are paid fees for ongoing advice and owe a full fiduciary duty; broker-dealers are primarily transaction-based and operate under the Reg BI standard.
Example
When an investor places a buy order for 100 shares of Apple through Charles Schwab, Schwab acts as a broker — routing the order to an exchange and executing it on the client's behalf, earning a commission or payment for order flow. When Schwab's internal market-making desk simultaneously buys Apple shares from another seller and sells them to the investor at a slightly higher price, it acts as a dealer — earning the spread. The same firm plays both roles, which is why the combined designation 'broker-dealer' is used.
Source: SEC — Guide to Broker-Dealers