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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

When a firm fills a client's buy order using shares held in its own inventory, in what capacity is the broker-dealer acting, and how is the firm compensated?

  1. In a dealer (principal) capacity, charging a mark-upAnswer
  2. B
    In a broker (agent) capacity, charging a commission
  3. C
    In an investment adviser capacity, charging an asset-based fee
  4. D
    In a clearing firm capacity, charging a settlement fee

Answer

In a dealer (principal) capacity, charging a mark-up
When a firm acts as a dealer (principal), it trades directly with the customer using its own inventory account. The compensation earned on a principal sell transaction is a mark-up added to the prevailing market price.

Step-by-Step Solution

1
Identify the trading role based on inventory involvement.
The firm is filling the order from its own inventory, which means it takes inventory risk and acts as a principal/dealer.
Trading for or from one's own account defines dealer/principal capacity.
2
Determine the form of compensation for principal transactions.
Principal transactions are compensated by adding a mark-up to a buy order or taking a mark-down on a sell order.
Commissions are charged only when acting as an agent/broker.

Key Concept

Broker-Dealer Execution Capacities (Broker/Agent vs. Dealer/Principal)
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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