Series 65: Principal Vs. Agency Transactions

Principal vs. Agency Transactions

Secondary market transactions are conducted primarily by brokers and dealers. A firm may act as one or the other, but not both on any particular transaction. When a firm acts as a broker, the firm serves as an agent, or matchmaker, for the buyer and the seller. The broker gets paid for the service by charging a commission. Transactions where a firm is acting as a broker are called agency transactions, since the firm is acting as an agent for the buyer and seller. In the OTC market, a firm that helps a client execute a trade but is not itself a market maker in the stock would be performing in an agency capacity. In this case, the firm would earn a commission rather than a markup on the trade.

When the firm acts as a dealer, in contrast, it is putting its own money at risk, buying or selling securities out of its own inventory. Rather than brokering a deal for another party, the dealer is a principal to the trade, since