Role of Market Participants

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