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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

When a firm executes transactions in the secondary market on behalf of customers by matching buyers and sellers and charging a commission, in what capacity is the firm acting?

  1. Agency capacity as a brokerAnswer
  2. B
    Principal capacity as a dealer
  3. C
    Clearing capacity as a depository corporation
  4. D
    Underwriting capacity in the primary market

Answer

The firm is acting in an agency capacity as a broker.
When a broker-dealer matches a buyer and seller in the secondary market without taking ownership of the security itself, it acts as an agent (broker) and charges a commission for executing the transaction.

Step-by-Step Solution

1
Identify the key characteristics of the transaction described in the scenario.
The firm matches buyers and sellers in the secondary market and charges a commission for the trade.
Understanding trade execution roles requires evaluating whether the firm trades for its own account or facilitates trades between third parties.
2
Distinguish between agency (broker) and principal (dealer) roles.
Brokers act as agents connecting buyers with sellers for a commission, while dealers act as principals buying and selling for their own account with mark-ups/mark-downs.
Firm capacity determines both regulatory duties and the form of compensation received.

Key Concept

Broker vs. Dealer Capacity (Agency vs. Principal)
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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