Trade Capacity: Principal vs. Agency
Chapters in this video
- 0:00 How broker-dealers make money from your trades
- 1:53 Agency capacity: matchmaker, commission, and best execution
- 3:46 Principal capacity: dealer, markup, and inventory sales
- 5:36 Riskless principal: the quick flip trap
- 7:00 Dual capacity prohibition: disclosure plus consent
- 8:34 Rapid-fire exam recap
What this video covers
- How commission reveals agency capacity and markup or markdown reveals principal capacity, and why these pairings are permanently linked on the exam
- What best execution means for an agent acting as a matchmaker between buyer and seller, and how the commission is separately disclosed
- Why a dealer acting as principal sells from its own inventory and embeds profit in the price rather than charging a separate fee
- What a riskless principal transaction is chronologically, and why it must still be disclosed as principal even though it functions like agency
- Why the dual capacity prohibition exists, and the two strict hurdles (disclosure and consent) required for the narrow exception
- How to spot exam traps that bait you into calling riskless principal an agency trade, or into accepting mere disclosure as sufficient for dual capacity
Read the full lesson, free
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