An investor receives a trade confirmation indicating that their securities firm executed an order to buy corporate shares by locating an independent seller in the secondary market and charging a commission for the transaction. Which of the following statements correctly identifies the capacity in which the firm acted and its resulting compensation?
- The firm acted as an agent (broker), facilitating the transaction between two parties for a commission.Answer
- BThe firm acted as a principal (dealer), buying or selling securities from its own proprietary inventory for a markup or markdown.
- CThe firm acted as an underwriter in a primary market transaction, receiving proceeds directly from the issuing corporation.
- DThe firm acted as a central clearing depository, netting trade obligations and maintaining custody of the securities.
Answer
The firm acted as an agent (broker), facilitating the transaction between two parties for a commission.
A broker-dealer acts in an agency (broker) capacity when it executes customer orders by finding a counterparty in the secondary market without taking the security into its own inventory. For this service, the firm charges a commission, which must be disclosed on the customer trade confirmation.
Step-by-Step Solution
Key Concept
Broker-Dealer Execution Capacity (Agency vs. Principal)