Market Participants

Section 1.2: Market Participants and How Markets Work Estimated study time: 45 minutes Content: Securities markets function because of a cast of specialized participants, each playing a distinct role. Understanding these roles — and the relationships between them — is essential for the SIE exam. Broker-dealers occupy the center of the market structure. A broker-dealer is a firm (or individual) registered with the SEC and FINRA to both execute securities transactions on behalf of customers (acting as a broker/agent) and trade securities from its own account (acting as a dealer/principal). When a firm acts as a broker, it earns a commission — a fee for executing the customer's order. When acting as a dealer, the firm buys or sells from its own inventory and profits from the markup (when selling to a customer) or markdown (when buying from a customer). The firm must disclose which capacity it is acting in for each transaction. Investment advisers (IAs) provide investment advice for compensation. They owe their clients a fiduciary duty — the highest legal standard of care — requiring them to always act in the client's best interest, disclose conflicts of interest, and avoid self-dealing. This fiduciary standard is stricter than the broker-dealer suitability standard. IAs with $110 million or more in assets under management (AUM) must register with the SEC. Those with less than $100 million in AUM register with state regulators. The $100 million to $110 million band allows either. Registered representatives (sometimes called stockbrokers or agents) are individuals associated with FINRA member broker-dealers who are licensed to solicit and accept securities orders, provide recommendations, and open and service customer accounts. To become registered, an individual must: (1) associate…