Series 6

Securities Markets - Broker-Dealers

A broker-dealer is a person or firm that is in the business of buying and selling securities.

Firm Roles
Securities firms can assume one of two roles when executing customer transactions on the exchanges or in the over-the-counter (OTC) market:


  • Agent/Broker: The first role is as agent, or broker, for the client. The firm will buy or sell a security on the client's behalf and charge a commission for the service. In other words, the firm acts as a matchmaker, essentially never owning the security but, instead, finding a suitable buyer or seller on the OTC market or executing the transaction for the customer on one of the exchanges.
  • Principal/Dealer: In the second role, the firm acts as principal, or dealer, and buys or sells the security for itself, assuming actual ownership and, therefore, taking on more risk. The firm might sell the security to a customer from its own inventory or it may buy a security for its proprietary account. The firm's profit comes from the commissions earned in the agent's role. However, when transacting business in the role of principal, it profits from the markup when it sells a security to a customer or from the markdown when it buys a security from the customer.
Exam Tips and Tricks
You should know the difference between a principal and an agent and how a broker-dealer can act in either capacity.




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