SIE Ready🔁 Market Structure · Lesson 3 of 4 · 5 min
Agent or Principal: Commission vs Markup
🤝 Is your firm finding you a seller, or is it the seller? The answer decides whether you pay a commission or a markup, and the confirmation must say which.
💡 Key idea
Broker = agent = commission. Dealer = principal = markup or markdown. One capacity per trade, disclosed on the confirmation.
🧠 Why it matters
A broker-dealer can act in two capacities. As a broker (agent), it arranges a trade between the customer and someone else and charges a commission. As a dealer (principal), it trades from its own inventory, buying from or selling to the customer. When it sells to a customer, it adds a markup over the current market price; when it buys from a customer, it subtracts a markdown. A firm cannot act as both agent and principal in the same trade, so it cannot charge both a commission and a markup on it. The trade confirmation must disclose the capacity. Market makers are dealers that continuously quote a bid and ask in a security and trade as principal. FINRA requires fair prices and commissions; its 5% markup policy is a guideline, not a hard limit. Memory line: BAC — Broker, Agent, Commission; DPM — Dealer, Principal, Markup.
📈 In the real world
🧮 Elena buys 1,000 shares of a thinly traded stock. Her firm makes a market in it and sells to her from inventory at 10.20 when the inside ask is 10.00. Her confirmation shows the firm acted as principal; the 20 cents per share is a markup, and no commission is added. Had the firm found another seller for her, it would have acted as agent and charged a commission instead.
📌 Takeaways
- Agent (broker) charges a commission; principal (dealer) charges a markup or markdown
- Never both capacities, or both charges, in the same trade
- Market makers are dealers that quote two-sided prices and trade as principal
📖 Terms in this lesson
Market maker: A dealer that stands ready to buy and sell a particular security from its own inventory at the prices it quotes.
Broker (agency capacity): A firm acting as agent, arranging a trade between its customer and another party for a commission without owning the security.
Dealer (principal capacity): A firm acting as principal, buying from or selling to customers from its own account and earning a markup or markdown.
BAC / DPM (broker vs dealer): Broker = Agent = Commission; Dealer = Principal = Markup or markdown.
✅ Test yourself
A firm sells a customer bonds from its own inventory. In what capacity did it act?
- As principal, earning a markup
- As agent, earning a commission
- As broker, earning a markdown
- As agent, earning a markup
Answer: A · As principal, earning a markup
Selling from inventory is a principal (dealer) trade, compensated by a markup. Agents earn commissions; a markdown applies when a dealer buys from a customer; agents never charge markups.
A dealer buys stock from a customer at a price below the current market. The difference is
- a markup
- a spread fee
- a commission
- a markdown
Answer: D · a markdown
When a dealer buys from a customer as principal, it pays less than the market price; that difference is a markdown. A markup applies when the dealer sells to a customer, and commissions apply to agency trades.
Which statement about a single customer trade is accurate?
- A firm acts as either agent or principal
- A firm must act as both broker and dealer
- A firm need not disclose its capacity
- A firm may charge a commission and a markup
Answer: A · A firm acts as either agent or principal
In any one trade the firm acts either as agent (commission) or as principal (markup/markdown), never both, and the confirmation must disclose which. Charging both would double-charge the customer.
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