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Question

Difficulty: EasyMarket Participants and Investor Classifications

When a broker-dealer executes a customer's trade by matching a buyer with a seller in the secondary market and charging a commission for the transaction, in what capacity is the firm operating?

  1. As a broker, acting in an agency capacityAnswer
  2. B
    As a dealer, acting in a principal capacity
  3. C
    As a depository, acting in a custody capacity
  4. D
    As a self-regulatory organization, acting in an enforcement capacity

Answer

The firm is operating as a broker, acting in an agency capacity.
In securities transactions, a broker-dealer acts as a broker (in an agency capacity) when it connects a buyer and a seller without buying or selling out of its own inventory. The firm earns a commission for facilitating this transaction.

Step-by-Step Solution

1
Identify the key operational facts in the scenario.
The firm matches a buyer and seller in the secondary market and charges a commission.
Determining whether the firm traded from inventory or facilitated a trade between external parties establishes firm capacity.
2
Distinguish between broker (agency) and dealer (principal) capacities.
Agency (broker) capacity = matching orders + charging commission. Principal (dealer) capacity = trading for own account + charging markup/markdown.
Securities rules strictly separate broker activities from dealer activities based on inventory involvement and compensation structure.
3
Select the matching role definition.
Matching buyers and sellers for a commission defines a broker acting in an agency capacity.
The firm acted as a middleman (agent) without taking ownership of the security.

Key Concept

Broker (Agency) vs. Dealer (Principal) Market Capacities
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Topics

Market Participants and Investor Classifications

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