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Difficulty: EasyTypes of Markets and Trading Venues

A market maker at a securities firm fills a customer's buy order for common stock by selling shares directly from its own proprietary inventory and charging a mark-up. In what capacity is the securities firm operating during this transaction?

  1. Principal capacityAnswer
  2. B
    Agent capacity
  3. C
    Primary market issuer
  4. D
    Clearing depository

Answer

The securities firm is operating in a principal capacity.
When a firm acts as a market maker selling securities directly from its own inventory, it operates in a principal (or dealer) capacity and receives compensation through a mark-up.

Step-by-Step Solution

1
Analyze how the firm is fulfilling the order.
The firm is filling the trade using shares from its own inventory.
Trading directly against a customer using firm inventory indicates dealer (principal) activity.
2
Evaluate the form of compensation.
The firm charges a mark-up on the sale.
Principals adjust the price with a mark-up (when selling) or mark-down (when buying) instead of charging a commission.

Key Concept

Broker vs. Dealer Execution Capacities
Estimated Time:45s
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Topics

Types of Markets and Trading Venues

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