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Question

Difficulty: MediumMarket Participants and Investor Classifications

A broker-dealer receives an order from a retail customer to purchase 500 shares of common stock. The firm does not hold the stock in its own inventory, so it locates a seller in the market, executes the trade on the customer's behalf, and charges a fee clearly identified as a commission on the trade confirmation. In this specific transaction, in what capacity did the broker-dealer act?

  1. As an agent acting in a broker capacityAnswer
  2. B
    As a principal acting in a dealer capacity
  3. C
    As a clearing agency performing continuous net settlement
  4. D
    As a self-regulatory organization exercising regulatory jurisdiction

Answer

The broker-dealer acted as an agent in a broker capacity because it executed the customer trade in the secondary market without holding the security in inventory and charged a commission.
The correct option states that the firm acted as an agent in a broker capacity. When a broker-dealer executes trades on behalf of customers by connecting buyers and sellers in the market without taking inventory risk, it operates in an agency capacity and is compensated through a commission.

Step-by-Step Solution

1
Analyze the transaction details
The firm matched a customer buyer with a market seller without using its own inventory, and charged a commission.
Identifying whether inventory was used and how the firm was compensated determines the transaction capacity.
2
Apply broker-dealer capacity rules
Broker/Agent role corresponds to connecting buyers and sellers for a commission (ABC mnemonic: Agent, Broker, Commission). Dealer/Principal role corresponds to trading from inventory for a mark-up/mark-down.
FINRA rules require clear identification of agency vs principal roles on trade confirmations.

Key Concept

Broker vs. Dealer Capacity (Agent vs. Principal)
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Topics

Market Participants and Investor Classifications

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