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As an investor, you need to be familiar with the different players in the investment arena and how
they buy and sell securities. Broker-dealers, registered representatives and the others have
specific roles in clearing the way for commerce in securities.
This tutorial will cover the following topics:

• Broker-Dealers
• What Broker-Dealers Are Not Allowed to Do
• Other Broker Services
• Registered Representatives, Market Makers and Specialists

Broker-Dealers
A broker is a person or firm that facilitates trades between customers. A broker acts as a gobetween
and, in doing so, does not assume any risk for the trade. The broker does, however,
charge a commission. A dealer is a person or firm that buys and sells for his or her own inventory
of securities and for others. A dealer therefore assumes risk for the transactions. Dealers may
mark securities up or down to make a profit on their transactions.
Many publications or websites use the term broker-dealer. A broker-dealer is allowed to operate
in either role, but never as both at the same time.
To be involved in the buying, selling or trading of securities, a person or firm must be registered
with the National Association of Securities Dealers (NASD). The NASD is a self-regulatory
organization created by the Securities and Exchange Commission (SEC). Brokers and dealers
must follow all rules of the NASD and SEC, including the NASD's Conduct Rules and its rules for
arbitration, complaints and dealings with the public.
Broker-dealer status can be revoked for freely breaking securities rules; for having been expelled
or suspended from any self-regulatory organization; for making misleading statements to the SEC
or the NASD; or for having committed felonies or misdemeanors in the securities industry.


What Broker-Dealers Are Not Allowed to Do
The following are practices that broker-dealers are forbidden to do:

• Churning: Excessive trading of a client's discretionary account to increase the broker's
• commissions.
• Use deception or manipulation to trade securities, or failing to state material facts
• Recommending low-priced, speculative securities without determining whether they are
• suitable for the customer
• Make unauthorized transactions
• Guarantee that loss will not occur
• Try to talk clients into buying mutual funds inappropriate for their means and goals
• Use fictitious accounts to disguise trades
• State that the SEC has approved or judged positively either the security or the broker
• Not promptly transmitting the client's money or securities

Broker-dealers convicted of any of these actions may be expelled or suspended by the NASD.
Because brokers have so much control over other people's money, their activities are highly
regulated.


Other Broker Services
Brokers, when authorized by the client, may set up discretionary accounts. These accounts allow
brokers to buy and sell securities for a client's account without contacting the client for each
transaction. The authorized broker may determine the security traded, how much of it may be
traded, the price and the time of transaction.
Brokers may lend funds to customers who have margin accounts. With margin accounts,
customers can buy additional securities with money borrowed from a broker.


Registered Representatives, Market Makers and Specialists


Registered Representatives


A registered representative is an individual who has passed the NASD's registration process and
is therefore licensed to work in the securities industry. The process includes an examination that
tests the candidate's knowledge of securities and markets. Further, the registration agreement
requires that the candidate agree to follow the rules of the NASD.
Registered representatives sell to the public; they do not work on exchange floors.


Market Makers


Market makers are firms that maintain a firm bid and offer price in a given security by standing
ready to buy or sell at publicly-quoted prices. The Nasdaq is a decentralized network of
competitive market makers. Market makers process orders for their own customers, and for other
NASD broker/dealers; all NASD securities are traded through market maker firms. Market makers
also will buy securities from issuers for resale to customers or other broker/dealers. About 10
percent of NASD firms are Market Makers; a broker/dealer may become a Market Maker if the
firm meets capitalization standards set down by the NASD.


Specialists


Specialists keep markets for securities orderly and continuous. This means they must buy when
there are others selling without buyers, and they must sell when others are buying without sellers.
They must maintain their own inventories of securities that are large enough for sizable trades.
Specialists both buy and sell out of these inventories and mediate between other customers.
Specialists work on the exchanges where they hold seats. Among their duties is buying and
selling odd-lots (trades of less than 100 shares) for exchange members. To trade a security, a
specialist must be able to keep a position on it with at least 5,000 shares. Specialists, like others,
who buy and sell for the public, are subject to rules and regulations. Specialists often choose to
keep inventories in multiple securities, often in more than one market sector.
This concludes our tutorial on brokers, specialists and market makers.