Financial Intermediaries in the US Stock Market

The US stock market is the largest market in the world, accounting for around 50% of market
capitalisation. Even the investment sector in the US grew much earlier than it did in most countries. However, like any other market, the US faced a major crisis in 1929, known as ‘The Great Depression’.

To regain investors' lost confidence, the US Government introduced the Securities and Exchange Commission (SEC) to regulate the market and protect investors. Through the SEC, financial intermediaries in the US stock market were also regularised for safe and steady capital formation.

Let’s take an in-depth look at these financial intermediaries in the US stock market.

• Financial intermediaries in the US stock market play a pivotal role in enabling all types of purchasing and selling.
• To regulate the stock market and financial intermediaries, the US introduced the Securities and Exchange Commission.
• The US stock market has a long list of financial intermediaries, such as broker-dealers, securities exchanges, clearing agencies, ECNs/ATNs, and investment banks.

Before moving ahead with the name, let’s first understand what financial intermediaries are. Financial intermediaries are the middlemen in a financial transaction between two parties. Here’s a list of key intermediary players in the US stock market:

Broker-dealers

As the name suggests, broker-dealers play a dual role in the stock market by selling and purchasing securities while also distributing other investment products. In simple words, the role of B-Ds in the US market is to either sell/purchase securities on their account as dealers or sell/purchase securities on account of others as brokers.

In the US, there are over
3,298 B-Ds, including big names like Edward Jones and Charles Schwab.

Clearing agencies

A clearing agency is a person or firm primarily responsible for ensuring the delivery of transactions. These agencies confirm and settle all kinds of financial transactions in the stock market.

Under
Section 3(a) 23(A) of the Securities and Exchange Act, clearing agencies have been defined. There are two types of clearing agencies: Clearing Corporations and Depository. The former deals with confirming and settling financial transactions, and the latter takes up the role of safely and electronically holding records.

Investment banks

Investment banks play a major role in the US stock market. Their working portfolio is diverse as it includes looking into mergers and acquisitions, underwriting new stocks/IPOs, and assuming the role of financial advisor to the public and government. Names like Goldman Sachs, JP Morgan Chase & Co., and UBS are leading investment banks in the US.

ECNs/ATSs

Alternative trading systems are the backbone of large purchases and sales in the stock market as they work to seamlessly match buy and sell orders. Now, an electronic communication network is possibly the most widely used type of ATS. It is a computer system that helps automate the matching of purchase and sale orders.

Note: A person can not place an order with ECNs directly. They need to have a broker account.

Securities exchange

A securities exchange is like the actual playing field for investors where the buying and selling of securities of the stock market takes place. There is a long list of securities exchanges in the US, including the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automated Quotation System (Nasdaq).

Any company that wishes to list its shares can do so in one of the securities exchanges registered with the SEC. It is only through these securities exchanges that investors can buy or sell stocks.

The role of financial intermediaries in the US stock market is to ensure safe, seamless, and streamlined financial transactions. The US market, including financial intermediaries, has long been regulated by the SEC. Interestingly, if one were to study the US stock market, its regularisation and shortcomings, it would be easy to draw parallels between the US stock market and the Indian stock market.