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 quoted prices. An associated person is anyone connected to a broker-dealer, though registration provisions exclude the solely clerical or ministerial. Every broker-dealer agent is an associated person, but not the reverse.
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, as the Securities Exchange Act of 1934 defines the term, 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, whether by entering quotations in an inter-dealer communications system or otherwise.
- Must maintain a two-sided market: willing to buy (the bid) as well as sell (the ask)
- 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 |
|---|---|---|
| Two-sided obligation | Willing to buy and sell (bid and ask) | No duty to stand ready on both sides |
| 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 its quoted prices.
- A dealer only willing to sell is not a market maker. A market maker must be willing to buy AND sell (a 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, but only for purposes of the Act's broker-dealer registration provisions; for other purposes the definition covers any employee
- These individuals do not effect securities transactions or make investment decisions, so the registration provisions leave them out. 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, and only for broker-dealer registration purposes. The receptionist and file clerk at a broker-dealer are excluded for those purposes 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. For example, someone who sells securities for an issuer, and not for any broker-dealer, is not an associated person of any 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 be willing to buy as well as sell, 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 for broker-dealer registration purposes (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)?