Series 53: 5.1.1. Principal Vs. Agency Transactions

Taken from our Series 53 Online Guide

5.1.1. Principal vs. Agency Transactions

A business that executes municipal securities trades can act as either a broker or a dealer. When acting as a broker, the firm serves as an agent, or go-between, 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.

When acting as a dealer, the firm 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 the transaction is adding to or depleting the dealer’s own account. A firm may act as broker or dealer on any particular transaction, but not both.

The dealer facilitates the trade by posting a bid quote and an ask quote.

The bid is the price at which the dealer is willing to buy the security. The best bid in a market is the highest bid because it is the highest price at which the customer can sell her securities to the dealer. The highest bid means the most money for the customer.

The ask is the price at which the dealer is willing to sell the security. The best ask is the lowest quote because this is the price at which t

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