Broker-Dealer Regulation
Broker-dealer regulation encompasses the comprehensive framework of rules, requirements, and oversight mechanisms that govern firms engaging in securities transactions. These regulations ensure market integrity, protect investors, and maintain financial system stability through capital requirements, operational standards, and conduct rules.
Core regulatory framework
Broker-dealer regulation operates across multiple tiers, from federal securities laws to self-regulatory organization (SRO) rules. The primary components include registration requirements, financial responsibility rules, and operational standards designed to protect market integrity and client assets.
Financial responsibility requirements
Net capital requirements
Broker-dealers must maintain minimum net capital based on their business activities and risk exposure. This ensures they can meet obligations to customers and counterparties while maintaining market stability.
Customer protection rule (Rule 15c3-3)
This rule requires segregation of customer assets from firm proprietary accounts, protecting client securities and funds from the broker-dealer's business risks.
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Operational requirements
Trading system controls
Broker-dealers must implement robust pre-trade risk checks and algorithmic risk controls to prevent erroneous orders and maintain market stability.
Market access requirements
Under Rule 15c3-5, firms must implement risk management controls for market access, including:
Trade reporting obligations
Broker-dealers must report transactions to appropriate facilities based on security type and execution venue:
- Equity trades to FINRA TRF
- Fixed income trades to FINRA TRACE
- OTC trades to FINRA ORF
Best execution requirements
Execution quality analysis
Firms must regularly evaluate execution quality across venues to ensure they meet best execution policies. This includes analyzing:
- Price improvement opportunities
- Execution slippage
- Market impact cost
- Speed of execution
Routing decisions
Broker-dealers must document and justify order routing decisions, considering factors such as:
- Market depth
- Liquidity
- Execution costs
- Technology capabilities
Surveillance and compliance
Market manipulation prevention
Firms must implement systems to detect and prevent manipulative practices such as:
- Spoofing
- Quote stuffing
- Wash trading
Transaction monitoring
Real-time trade surveillance systems must monitor for:
- Unusual trading patterns
- Potential insider trading
- Market manipulation attempts
Record keeping requirements
Broker-dealers must maintain detailed records of:
- Trading activity
- Customer accounts
- Risk management procedures
- Compliance programs
These records support trade reconstruction requirements and regulatory examinations.
Impact on market structure
Broker-dealer regulations significantly influence market structure through:
- Capital formation efficiency
- Market liquidity provision
- Price discovery processes
- Risk management standards
The regulatory framework continues to evolve with market structure changes, including:
- Electronic trading advancement
- New product development
- Cross-border activities
- Technological innovation
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.