3.3.2 Commissions, Markups, and Charges
Markups and markdowns are compensation taken by dealers (market makers) on transactions. Markups are added to the price of a security on buy orders. Markdowns are subtracted from the price of a security on sell orders. When a firm acts as a dealer, it is putting its own money at risk, buying or selling securities out of its own inventory. It profits by the spread between the bid-and-ask price plus any markup or markdown that the dealer may receive. When a firm includes the markup in the price, the price is called a net price.
Commissions are the fees charged by brokers to execute transactions. A commission is generally charged as a percentage of the value received, such as a percentage of the amount of a sale or purchase. Similarly, in the OTC market, a firm that helps a customer 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.
Whether a dealer buys or sells a security from its own account or a broker buys or sells a security for a customer, the price at which the transaction takes place must be fair and reasonable. A sta