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Difficulty: MediumTypes of Markets and Trading Venues

A retail investor contacts a member firm to purchase shares of a stock traded on a national exchange. The firm locates an independent seller in the secondary market, executes the order on the customer's behalf without taking the security into its proprietary account, and assesses a commission fee for the transaction. Which of the following best describes the role of the firm in this specific trade?

  1. Acting in a broker (agency) capacityAnswer
  2. B
    Acting in a dealer (principal) capacity
  3. C
    Acting as an underwriter in a primary market transaction
  4. D
    Acting as a clearing agency (NSCC) for trade settlement

Answer

The firm acted in a broker (agency) capacity by executing the order on behalf of the customer and charging a commission without taking inventory risk.
When a firm acts as an intermediary connecting a buyer and seller in the secondary market without taking the position into its own inventory, it is operating in an agency (broker) capacity and earns a commission.

Step-by-Step Solution

1
Analyze the transaction capacity
The firm matched a buyer and seller without using its own inventory and charged a commission.
Firms executing customer orders as agents for a commission function as brokers.
2
Distinguish between broker (agent) and dealer (principal) roles
Brokers act as agents and charge commissions, while dealers act as principals, trade from inventory, and charge mark-ups or mark-downs.
Understanding trade capacity is a fundamental capital markets standard.

Key Concept

Broker (Agency) vs. Dealer (Principal) Execution Roles
Estimated Time:1m 0s
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Topics

Types of Markets and Trading Venues

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