Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsEasy
A broker-dealer firm acts as an agent in a transaction. This means the firm is:
- ABuying or selling securities for its own account.
- BFacilitating a transaction between a buyer and a seller.
- CTaking on the risk of the securities inventory.
- DMaking a profit from the bid-ask spread.
Show answer & explanationAnswer & explanation
Correct answer: B. Facilitating a transaction between a buyer and a seller.
When a broker-dealer acts as an agent, it executes trades on behalf of its clients, connecting buyers and sellers without taking ownership of the securities. For this service, the firm earns a commission.
Why the other options are wrong
- A. This describes acting as a principal (dealer).
- C. This describes acting as a principal (dealer) or market maker.
- D. This describes acting as a market maker (type of dealer).
Broker vs. Dealer
A broker acts as an agent, executing trades on behalf of clients and earning commissions. A dealer acts as a principal, trading from its own inventory and earning a markup/markdown or spread.
- Broker = Agent = Commission.
- Dealer = Principal = Markup/Markdown or Spread.
- Some firms act as both (broker-dealers).
Memory trick: Agent is 'A'lways 'A'ssisting the client, not owning.