This page of our SIE Study Guide provides an overview of market participants. The securities industry holds many moving parts. Below are descriptions of market participants and their roles that help maintain smooth and efficient markets.
Investors
Retail: Also known as individual investors, retail investors are individuals who buy and sell public debt and equity securities through their retirement or brokerage accounts. They invest using their own money for their own personal goals such as retirement or saving up for a house. The SEC considers retail investors to be unsophisticated and, as a result, most securities regulations are targeted at keeping this particular class of investors protected.
Accredited: An accredited investor can be an individual or an entity. They must meet certain requirements related to their net worth, income, qualifications, experience, or certifications in order to be considered accredited. Once they reach this status, they are permitted to trade in private securities not registered with the SEC, including private placements and venture capital.
Individuals are considered to be accredited if they meet the following criteria outlined in Rule 501 of Regulation D:
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
- Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000.
Institutional: Unlike retail and accredited investors, institutional investors can only be legal entities, such as real estate investment trusts, venture capital funds, insurance companies, credit unions, banks, pension funds, hedge funds, and mutual funds. These investors trade in securities on behalf of their clients or shareholders and they buy and sell in large quantities.
Known to have “smart money”, institutional investors are considered sophisticated enough to make their own investment decisions and are thus subject to fewer rules and regulations. For example, there is an exemption made for institutional investors in FINRA Rule 2111 regarding suitability requirements.
Broker-Dealers
While broker and dealer are often written together, they are in fact separate and distinct terms. A broker is an entity that trades in securities on behalf of its clients while a dealer or principal trades on behalf of itself. Both entities are subject to FINRA regulations and, as most firms act as both a broker and a dealer, we refer to many firms as broker-dealers.
- Introducing: Introducing brokers do not hold client funds nor do they execute transactions. While they are able to receive orders for securities from customers, they must contract with a clearing firm to process them.
- Clearing: Clearing firms hold customer accounts and are responsible for clearing trades and ensuring those trades reach settlement.
- Prime Brokers: Prime brokers are unique in that they only service large financial institutions as a way for those institutions to outsource certain activities, such as trade clearing and settlement or risk and performance analysis.
Investment Advisers
Registered with state regulators and/or the SEC, an investment adviser can be an individual or a company. They are paid by their clients to provide advice about securities investments, manage investment portfolios, or to provide other financial planning or brokerage services. Other common names for investment advisers include portfolio managers, wealth managers, or asset managers. Morgan Stanley Wealth Management is an example of an investment adviser. Individuals who work on behalf of the firm are known as investment adviser representatives.
- Investment advisers are fiduciaries which means they have a legal obligation to act in the best interests of their clients.
Municipal Advisors
Firms that provide municipal advisory services are required to register with both the SEC and the MSRB. Section 15B of the Securities Exchange Act defines “municipal advisor” as a person that:
- Provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or
- Undertakes a solicitation of a municipal entity.
Issuers and Underwriters
Issuers are legal entities that fund their operations by selling securities (such as common stock) to investors. If an issuer sells securities to the general investing public, through an IPO for example, then they are required to make certain filings with the SEC. Underwriters facilitate the sale and distribution of an issuer’s securities by pricing the securities, purchasing the securities directly from the issuer, and then finally selling the securities to investors.
Traders and Market Makers
Brokerage firms which engage in providing day to day availability for public investors who wish to buy or sell stocks and bonds. To maintain sales liquidity, Market Makers will buy or sell securities of a defined set of companies to broker dealers who are members of the exchange.
Custodians and Trustees
A trustee is an individual, broker, bank, or other similar organization charged with governing a trust. They manage and administer investments or other assets on behalf of the beneficiary of the trust and generally have a fiduciary responsibility to the trust. A custodian is the entity (typically a bank or brokerage firm) that actually holds the assets for safekeeping.
Transfer Agents
Typically a bank or a trust company, transfer agents act as intermediaries between securities issuers and securities holders. They are primarily responsible for maintaining security holder records and distributing dividends on behalf of the issuing company.
- In some cases, companies might elect to act as their own transfer agents.
- Transfer agents are required to be registered with the SEC. If the transfer agent is a bank, then they are required to be registered with a bank regulatory agency.
Depository Trust & Clearing Corporation (DTCC)
The DTCC manages the daily clearing and settlement processes for most securities transactions in the United States. A good way of thinking about this is that when you write a check, it is not ‘good’ until it ‘clears.’ Similarly in the stock market, your purchase isn’t ‘good’ until it clears through the DTCC.
- The largest options clearing house is the Options Clearing Corporation (OCC) which is governed by the Commodities Futures Trading Commission (CFTC) and the SEC.