Quick Answer
A market maker is a dealer that holds itself out as willing to buy and sell a security for its own account on a regular or continuous basis at publicly quoted prices. An associated person is anyone connected to a broker-dealer (partners, officers, directors, employees, control persons), except employees whose functions are solely clerical or ministerial. Every broker-dealer agent is an associated person of that broker-dealer, but not every associated person is an agent, and an agent of an issuer need not be a broker-dealer's associated person at all.
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.
What Is a Market Maker?
A market maker is a dealer that holds itself out as willing to buy and sell a particular security for its own account on a regular or 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)
- Provides liquidity by standing ready as a regular counterparty, though this is not an absolute guarantee that a counterparty is always available for every trade
- Profits from the spread: the difference between the bid (lower) and ask (higher) prices
- Obligated to honor its displayed quoted prices
| Feature | Market Maker | Regular Dealer |
|---|---|---|
| Quoting obligation | Must quote both bid and ask | No continuous quoting requirement |
| Liquidity role | Regular or continuous counterparty | Trades at its own discretion |
| Profit source | Bid-ask spread | Trading profits |
| Market presence | Regular or continuous | 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 buy and sell for its own account on a regular or continuous basis, maintaining a 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).
Who Is an Associated Person?
An associated person of a broker-dealer is broadly defined under the Securities Exchange Act of 1934 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?
- Employees whose functions are solely clerical or ministerial 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. An employee who performs any non-clerical function loses this exclusion, even if they also do clerical work
Exam Tip: Gotchas
- Only employees whose functions are SOLELY clerical or ministerial are excluded. The receptionist and file clerk at a broker-dealer are excluded because they do only clerical work. An employee who performs any other function loses the exclusion.
How Does an Associated Person Differ From an 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 broker-dealer agent is an associated person of that broker-dealer, but not every associated person is an agent. An issuer's agent, however, need not be a broker-dealer's associated person at all, since "associated person" is defined relative to a broker-dealer
- 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 on behalf of a broker-dealer 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).
What Should You Check on Exam Day?
- Can you explain why a market maker must quote both a bid and an ask, not just one side?
- Do you know how a market maker profits (the spread) versus a regular dealer's trading profits?
- Can you list who is included in the associated person definition, and who is excluded (employees whose functions are SOLELY clerical or ministerial)?
- Do you know that every broker-dealer agent is an associated person of that broker-dealer, but not every associated person is an agent, and that an issuer's agent need not be a broker-dealer's associated person at all?
- Can you give an example of an associated person who is not an agent (a compliance officer)?