Series 55

By Jeff Van Blarcom AAA

Commissions And Trade Complaints - Transactions

Riskless Principal Transactions

If a brokerage firm receives a customer order to buy or sell a security and the firm does not have an inventory position in the security, the firm may still elect to execute the order on a principal basis. If the firm elects to execute the order on a principal basis, this is known as a riskless principal transaction. Because the dealer is only taking a position in the security to fill the customer’s order, the dealer is not taking on any risk. As a result the mark up or mark down on riskless transactions will be based on the dealer’s actual cost, not on the inside market. Let’s look at an example:

Example:

Bid Ask

10.00 10.05

A customer wants to purchase 100 shares ABCD from the dealer and the dealer executes the order on a principal basis by purchasing the shares for its own account at $10.02 only to immediately resell the stock to the customer. The markup in this case must be based on the dealer’s actual cost of $10.02 and the maximum the dealer could charge the customer would be $10.521 per share or $1,052.10 for the entire order.

Proceeds Transactions

In a proceeds transaction, the customer sells a security and uses the proceeds from that sale to purchase another security on the same day. FINRA’s 5% policy states that: a firm may only charge the customer a combined commission or mark up and mark down of 5% for both transactions, not 5% on each.

Dominated And Controlled Markets

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