Understanding who does what in securities markets matters for the exam. This section covers the key participants in trade execution, clearing, custody, and market making.
Introducing Broker-Dealer
- Maintains the customer relationship and accepts orders
- Does not hold customer funds or securities and does not clear or settle trades
- Routes orders to a clearing broker-dealer for execution and settlement
Clearing Broker-Dealer (Custodian)
- Holds customer funds and securities (custody)
- Processes, clears, and settles trades
- Sends trade confirmations and account statements
- Direct member of a clearing agency (e.g., Depository Trust & Clearing Corporation (DTCC) / National Securities Clearing Corporation (NSCC))
Exam Tip: Gotchas
- Introducing broker-dealers do not hold client assets. Clearing broker-dealers do.
Market Makers
- Stand ready to buy and sell a particular security on a continuous basis at publicly quoted prices
- Trade as principal from their own inventory
- Provide liquidity to the market
- Profit from the bid-ask spread
- Required to maintain a two-sided quote (both bid and offer)
Exam Tip: Gotchas
- Market makers always trade as PRINCIPAL, never as agent. They use their own inventory and are compensated by the spread, not a commission. A question that describes "bid-ask spread" or "two-sided quote" is pointing at principal/market-maker activity.
Exchanges
- Centralized, regulated marketplaces where securities are listed and traded (e.g., NYSE, Nasdaq)
- Provide price transparency, fair and orderly trading, and regulatory oversight
- Match buy and sell orders through an electronic order book or auction system