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Question

Difficulty: EasyMarket Participants and Investor Classifications

A registered securities firm fills a retail customer's buy order by selling shares directly out of its own inventory and charging a mark-up. In what capacity is the securities firm acting during this trade?

  1. Dealer (Principal) capacityAnswer
  2. B
    Broker (Agent) capacity
  3. C
    Clearing agency capacity
  4. D
    Self-Regulatory Organization capacity

Answer

The firm acted in a Dealer (Principal) capacity because it filled the trade from its own inventory and charged a mark-up.
When a firm executes a transaction using its own inventory, it acts as a dealer (principal) in the transaction and adjusts the price with a mark-up (for sales) or a mark-down (for purchases).

Step-by-Step Solution

1
Identify the source of securities for the trade execution.
The firm sold securities directly out of its own account inventory.
Trading from inventory defines a principal transaction.
2
Identify the type of compensation charged to the customer.
The firm earned compensation through a mark-up.
Dealers earn compensation via mark-ups or mark-downs, while brokers earn commissions.

Key Concept

Broker vs. Dealer Functional Capacities
Estimated Time:45s
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Topics

Market Participants and Investor Classifications

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