Examkin

Question

Difficulty: EasyMarket Participants and Investor Classifications

When a registered broker-dealer fills a customer's buy order by selling securities directly from its own firm inventory and charging a mark-up, in what capacity is the broker-dealer acting?

  1. As a principal (dealer), trading for its own accountAnswer
  2. B
    As an agent (broker), matching buyers and sellers for a commission
  3. C
    As a clearing agency, netting and settling trade obligations
  4. D
    As a self-regulatory organization, enforcing trade execution standards

Answer

The broker-dealer is acting in a principal (dealer) capacity by trading directly out of its own inventory and charging a mark-up.
When a securities firm buys or sells securities for or from its own account (inventory), it acts in a dealer or principal capacity. Compensation in principal transactions takes the form of a mark-up when selling to a client or a mark-down when buying from a client.

Step-by-Step Solution

1
Identify the trade execution mechanism described in the scenario.
The firm sells securities directly out of its own inventory to the customer.
Trading from inventory defines principal market-making operations.
2
Determine the legal capacity and compensation structure associated with inventory trading.
Firms acting as principal (dealer) earn compensation via mark-ups (when selling) or mark-downs (when buying).
Broker-dealers cannot act as both agent and principal on the same transaction.

Key Concept

Broker vs. Dealer (Principal vs. Agent) Capacities
Rate this question

Topics

Market Participants and Investor Classifications

More questions from this topic