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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

When a broker-dealer executes a customer order by selling securities directly from its own inventory, in what capacity is the firm acting, and what form of compensation does it receive?

  1. Acting in a principal capacity and charging a mark-upAnswer
  2. B
    Acting in an agency capacity and charging a commission
  3. C
    Acting in a clearing capacity and receiving netting fees from the NSCC
  4. D
    Acting in a regulatory capacity and collecting statutory SRO fees

Answer

Acting in a principal capacity and charging a mark-up
When a firm trades directly with a customer using its own inventory, it acts as a dealer in a principal capacity. For selling securities out of its inventory, the firm adds a mark-up to the price.

Step-by-Step Solution

1
Determine the trade role based on inventory involvement
Since the firm is trading from its own inventory, it is acting as a dealer/principal.
Principal trading involves buying into or selling out of proprietary firm inventory.
2
Determine the corresponding type of compensation
A principal transaction involves a mark-up (when selling) or a mark-down (when buying).
Broker-dealers cannot charge commissions when acting in a principal capacity.

Key Concept

Broker vs. Dealer Capacity and Compensation
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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