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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

A registered broker-dealer receives an order from a retail investor to purchase 100 shares of XYZ common stock. The firm fills the transaction by selling the stock directly to the customer out of its own proprietary inventory and adjusting the price with an extra charge. In what capacity did the broker-dealer act in this transaction, and how was it compensated?

  1. In a principal capacity, compensated by a mark-upAnswer
  2. B
    In an agent capacity, compensated by a commission
  3. C
    In a principal capacity, compensated by a commission
  4. D
    In an agent capacity, compensated by a mark-up

Answer

The broker-dealer acted in a principal capacity and was compensated by a mark-up.
When a broker-dealer fills a customer's buy order using securities from its own inventory, it is acting as a dealer (principal) in the trade. For principal sales to retail customers, compensation is earned by adding a mark-up to the prevailing market price.

Step-by-Step Solution

1
Determine the execution capacity based on trade fulfillment.
The firm filled the customer order directly out of its own inventory.
Selling out of proprietary inventory defines acting in a principal (dealer) capacity.
2
Identify the mandatory compensation model for principal sales.
When selling to a customer as a principal, the firm adds a mark-up to the purchase price.
Commissions apply only when acting as an agent (broker) matching third-party buyers and sellers.

Key Concept

Broker-Dealer Execution Capacities (Agent/Broker vs. Principal/Dealer)
Estimated Time:45s
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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