Section 8.7 – Broker-Dealer Roles & Settlement

When acting as an agent, the BD helps a customer buy or sell securities for someone else.
The BD does not own the securities being traded.
They charge a commission for their service.
This is called acting in a brokerage capacity.
Key word: “Agent = Commission.”

Example:
A BD helps a customer buy 100 shares of ABC stock from another investor → earns a commission.

When acting as a principal, the BD trades with the customer from the firm’s own inventory.
The BD is a party to the trade (either the buyer or seller).
Instead of a commission, the BD makes money on the markup or markdown (the spread).
Also called acting in a dealer capacity or being a market maker.
Key word: “Principal = Profit on the Spread.”

Example:
A BD sells 100 shares of XYZ from its own inventory to a customer → earns a markup.

Settlement = The process of exchanging securities and funds between buyer and seller after a trade.
It ensures both parties receive what they are owed:
- Buyer → receives securities
- Seller → receives money
A. Regular Way Settlement (T+1)
- The industry standard for most securities (stocks, bonds, options).
- “T+1” means trade date + 1 business day.
- Weekends and holidays do not count as business days.
Example:
Trade executed on Monday → Settlement on Tuesday.
B. Cash Settlement (Same Day)
- Delivery of securities and payment occur the same day the trade is executed.
- Used when both sides agree to settle immediately.
- Not the same as a cash trade (which just means no margin borrowing).

Broker-Dealer

When physical certificates are delivered:
Must be endorsed (signed) by all owners listed on the certificate.
Must be signed exactly as the name appears on the certificate.
- Example: If the certificate says “James T. Kirk”, the endorsement must read “James T. Kirk.”
Instead of signing the back, the investor can sign a stock power (for stocks) or bond power (for bonds).
For security, if mailing, send the certificate and the signed power in separate envelopes.

Book-entry securities: Most securities today exist electronically, not as paper certificates.
Street name registration: Securities are held in the name of the BD (the “street”) on behalf of the customer.
- The BD’s name appears on the books, not the investor’s.
- Simplifies recordkeeping and eliminates physical delivery.
- No signature needed for transfer.

A) Markup
B) Commission
C) Spread
✅ Answer: B) Commission
A) From another firm’s inventory
B) From the customer’s account
C) From its own inventory
✅ Answer: C) From its own inventory
A) Same day (T)
B) Trade date + 1 business day (T+1)
C) Trade date + 2 business days (T+2)
✅ Answer: B) T+1

A) The same trade
B) The same day
C) For different clients
✅ Answer: A) The same trade
A) In book-entry form
B) In nominee name
C) In street name
✅ Answer: C) In street name
Exactly as the name appears on the certificate.