Market Makers and Associated Persons
With the definitions of broker-dealers and underwriters established, let's look at two more key roles within the broker-dealer ecosystem: market makers who provide liquidity and associated persons who are connected to broker-dealer firms.
Market Maker
A market maker is a dealer that holds itself out as ready to buy and sell a particular security on a continuous basis at publicly quoted prices.
- Must maintain a two-sided market - quoting both a bid price (willing to buy) and an ask price (willing to sell) simultaneously during exchange hours
- Provides liquidity - ensures that investors can always find a counterparty for their trades
- Profits from the spread - the difference between the bid (lower) and ask (higher) prices
- Obligated to buy and sell at their displayed prices
| Feature | Market Maker | Regular Dealer |
|---|---|---|
| Quoting obligation | Must quote both bid and ask | No continuous quoting requirement |
| Liquidity role | Provides continuous liquidity | Trades at its own discretion |
| Profit source | Bid-ask spread | Trading profits |
| Market presence | Continuous during exchange hours | As needed |
Exam Tip: Gotchas
- A market maker is a type of dealer, but not all dealers are market makers. The distinguishing feature is the obligation to maintain a continuous two-sided market (both bid and ask) at publicly quoted prices.
- A dealer only willing to sell is not a market maker. Market makers must quote both a bid AND an ask (two-sided market).
Associated Person
An associated person of a broker-dealer is broadly defined under the Securities Exchange Act of 1934, Section 3, to include:
- Any partner, officer, director, or employee of a broker-dealer
- Any person controlling, controlled by, or under common control with the broker-dealer
Who is excluded?
- Clerical and administrative staff are excluded from the definition of associated person
- These individuals do not effect securities transactions or make investment decisions, so they fall outside the regulatory scope
Exam Tip: Gotchas
- Clerical staff are NOT associated persons. The receptionist and file clerk at a broker-dealer are excluded from the definition because they do not effect transactions or make investment decisions.
Associated Person vs. Agent
This is a key distinction for the exam:
- Associated person (broad): Anyone connected to the broker-dealer (BD), including partners, officers, directors, employees, and control persons
- Agent (narrow): An individual who actually effects securities transactions on behalf of a BD or issuer
- Every agent is an associated person, but not every associated person is an agent
- A compliance officer, for example, is an associated person but is not an agent (does not effect transactions)
- An associated person who effects securities transactions must register as an agent
Exam Tip: Gotchas
- "Associated person" and "agent" are not interchangeable. Associated person is the broader category (anyone connected to the broker-dealer); agent is narrower (only individuals who effect transactions).