An individual investor submits a market order to purchase 500 shares of an unlisted corporate stock. The broker-dealer handling the trade fills the order directly using shares held in its own account and charges the customer a mark-up. In what capacity did the broker-dealer execute this transaction?
- As a principal acting as a dealer for its own inventoryAnswer
- BAs an agent acting as a broker charging a commission
- CAs an underwriter distributing new shares in the primary market
- DAs a clearing corporation guaranteeing trade settlement
Answer
The broker-dealer executed the transaction as a principal acting as a dealer for its own inventory.
When a firm acts as a dealer (principal capacity), it buys and sells securities for its own account. In secondary over-the-counter (OTC) trading, selling shares directly from proprietary inventory to a customer at a price that includes a mark-up confirms the firm executed the trade as a principal.
Step-by-Step Solution
Key Concept
Broker vs. Dealer Role Execution in Secondary Markets