5.4. Principal vs. Agency Transactions

Secondary market transactions are conducted by brokers and dealers. A firm may act as one or the other on any particular transaction, but not both.

When a firm acts 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.

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,