Market Participants

The securities industry involves many different players, each with distinct roles. Understanding who does what — and who regulates whom — is essential for the SIE exam.

Overview of Key Players

---

Broker-Dealers

A broker-dealer is a firm or individual that buys and sells securities — either for customers or for its own account.

The Dual Role

The name "broker-dealer" reflects two distinct functions:

In Practice

When you call your brokerage firm to buy 100 shares of Apple:

• If they find someone else selling Apple shares and match you up, they're acting as a broker (agent)
• If they sell you shares from their own inventory, they're acting as a dealer (principal)

The firm must disclose which capacity it's acting in for each transaction.

Registration Requirements

Broker-dealers must:

• Register with the SEC under the Securities Exchange Act of 1934
• Become members of FINRA
• Register in each state where they conduct business
• Ensure all representatives pass required qualification exams

---

Registered Representatives (Agents)

Registered representatives — also called agents — are the individuals who work for broker-dealers and interact with customers. They're the salespeople of the securities industry.

What They Do

• Solicit and accept customer orders
• Provide investment recommendations
• Open and service customer accounts
• Educate customers about investment products

Registration Requirements

To become a registered representative, an individual must:

1. Associate with a FINRA member firm (get sponsored)
2. Pass the SIE exam (if not previously passed)
3. Pass a representative-level exam (Series 6, 7, etc.)
4. Register with FINRA through their firm
5. Register in applicable states

Important Distinction

Registered representatives can only conduct business while associated with a broker-dealer. If they leave their firm, their registrations become inactive until they join another firm.

---

Investment Advisers

An investment adviser is a person or firm that provides advice about securities for compensation. Unlike broker-dealers who primarily execute trades, investment advisers focus on ongoing advice and portfolio management.

Key Characteristics

Registration Thresholds

Investment Adviser Representatives (IARs)

Investment adviser representatives are individuals who work for investment advisers and provide advice to clients. They typically register at the state level, regardless of whether their firm is SEC or state registered.

---

Custodians

A custodian is a financial institution that holds and safeguards securities on behalf of clients. Think of them as the "vault" for your investments.

Key Functions

• Safekeeping — Physically or electronically holds securities
• Settlement — Ensures smooth transfer of assets when trades are executed
• Record-keeping — Maintains accurate records of holdings
• Corporate actions — Processes dividends, stock splits, and other events

Why Custodians Matter

In today's markets, most securities exist only as electronic records. Custodians maintain these records and ensure assets aren't lost, stolen, or mishandled.

Common Custodians

Large custodians include banks and trust companies like:

• State Street
• Bank of New York Mellon
• Northern Trust

---

Transfer Agents

A transfer agent records changes in securities ownership and maintains the issuer's shareholder records. They work on behalf of the company that issued the securities.

Key Functions

• Record ownership changes when securities are bought and sold
• Maintain shareholder records including names, addresses, and holdings
• Issue and cancel certificates (though most securities are now book-entry)
• Distribute dividends and other payments to shareholders
• Handle lost or stolen certificates

Registration

Transfer agents must register with the SEC. Unlike broker-dealers, there is no self-regulatory organization (SRO) that oversees transfer agents.

Transfer Agent vs. Custodian

---

Clearing Corporations

Clearing corporations ensure that securities transactions settle properly. They act as intermediaries between buyers and sellers to reduce risk.

Key Functions

• Clear trades — Confirm and match trade details
• Settle transactions — Ensure securities and cash change hands
• Guarantee settlement — Reduce counterparty risk
• Net positions — Reduce the number of actual transfers needed

The Main Clearing Corporation

The Depository Trust & Clearing Corporation (DTCC) handles the vast majority of U.S. securities clearing and settlement. Its subsidiaries include:

• NSCC — National Securities Clearing Corporation (equities)
• FICC — Fixed Income Clearing Corporation (bonds)
• DTC — Depository Trust Company (securities depository)

---

Market Makers

Market makers are broker-dealers that commit to buying and selling specific securities at publicly quoted prices. They provide liquidity to the markets.

How They Work

A market maker quotes two prices:

• Bid price — The price they'll pay to buy from you
• Ask price — The price they'll charge to sell to you

The difference between these prices is the spread, which represents the market maker's profit.

Example

A market maker quotes: $50.00 bid / $50.10 ask

• They'll buy shares from sellers at $50.00
• They'll sell shares to buyers at $50.10
• They profit $0.10 per share on the spread

Designated Market Makers (DMMs)

On the New York Stock Exchange, Designated Market Makers (formerly called specialists) have special obligations to maintain fair and orderly markets in assigned securities.

---

How Participants Work Together

When you place a trade, multiple participants coordinate:

1. You place an order through your broker-dealer
2. Your broker-dealer routes the order to an exchange or market maker
3. The market maker provides liquidity if needed
4. The clearing corporation confirms and settles the trade
5. The custodian updates your holdings
6. The transfer agent updates the issuer's records

This entire process typically completes in two business days (T+1 as of 2024).

---

Key Takeaways

• Broker-dealers execute trades as brokers (agents) or dealers (principals)
• Registered representatives must be sponsored by a broker-dealer
• Investment advisers provide advice for a fee and owe a fiduciary duty
• Custodians hold assets; transfer agents record ownership
• Clearing corporations settle trades and reduce counterparty risk
• Market makers provide liquidity by quoting bid and ask prices