Series 7 practice questionmediumTrade Confirmations — Agency vs. Principal
A trade confirmation shows that the broker-dealer acted as 'principal' in a transaction. This means the firm:
- ACharged a commission on the trade
- BActed as an intermediary between buyer and seller for a fee
- CExecuted the trade on a foreign exchange
- DTraded from its own inventory, and the customer pays a markup or markdown instead of a commission✓ Correct answer
Explanation
Why D — Traded from its own inventory, and the customer pays a markup or markdown instead of a commission
When a broker-dealer acts as principal (also called a dealer), it trades from its own inventory, buying securities from or selling securities to the customer. In principal transactions, the customer pays a markup (when buying) or receives a markdown (when selling) rather than a commission. When the firm acts as agent (broker), it executes the trade on behalf of the customer on an exchange or in the OTC market and charges a commission. The trade confirmation must clearly disclose the firm's capacity.
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