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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

An investor places an order with a securities firm to purchase 500 shares of a publicly traded common stock. The firm executes the transaction by locating a willing seller in the market and matching the buyer and seller without taking the securities into its own inventory. In what capacity did the securities firm act during this trade, and how is it compensated?

  1. Agent (Broker) capacity, compensated by charging a commissionAnswer
  2. B
    Principal (Dealer) capacity, compensated by adding a mark-up
  3. C
    Principal (Dealer) capacity, compensated by deducting a mark-down
  4. D
    Investment Adviser capacity, compensated by charging an annual asset-under-management fee

Answer

The firm acted in an Agent (Broker) capacity and is compensated by charging a commission.
The correct answer specifies that the firm acted in an agent (broker) capacity and earned a commission. When a broker-dealer executes trades by matching buyers and sellers without buying or selling for its own account, it acts as an agent (middleman) and must be compensated via a commission disclosed on the trade confirmation.

Step-by-Step Solution

1
Analyze the execution method described in the scenario.
The firm matched a customer buy order with a seller in the secondary market without using its own inventory.
Determining whether inventory was used establishes the capacity in which the firm executed the transaction.
2
Identify the firm capacity and appropriate compensation structure.
Firms matching buyers and sellers act as agents (brokers) and charge a commission.
Broker-dealers operating in an agency capacity facilitate trades between third parties for commission compensation under FINRA rules.

Key Concept

Broker vs. Dealer Capacity and Compensation Structures
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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