Market Participants

The securities markets involve many different participants, each playing specific roles. Understanding these roles is essential for Series 7 representatives.

Broker-Dealers

A broker-dealer is a firm that engages in the business of buying and selling securities.

Broker vs. Dealer

Most firms act in both capacities, hence "broker-dealer."

Agent vs. Principal

Key Point: A firm cannot charge both a commission AND a markup on the same transaction.

Registration Requirements

Broker-dealers must:

• Register with the SEC (Form BD)
• Join a self-regulatory organization (FINRA)
• Register in states where they do business
• Register associated persons (representatives)

Market Makers

Market makers provide liquidity by continuously quoting bid and ask prices.

Market Maker Obligations

Market Maker Compensation

Market makers earn the spread (difference between bid and ask):

• Buy at bid, sell at ask
• Spread compensates for risk and provides profit
• Tighter spreads indicate more competition/liquidity

Self-Regulatory Organizations (SROs)

SROs are non-governmental organizations that create and enforce rules for their members.

FINRA (Financial Industry Regulatory Authority)

FINRA is the primary SRO for broker-dealers:

MSRB (Municipal Securities Rulemaking Board)

MSRB regulates municipal securities dealers and advisors:

• Creates rules for municipal market participants
• Does NOT enforce rules (FINRA/SEC enforce)
• Operates EMMA for municipal market transparency

Exchange SROs

Major exchanges also function as SROs:

• NYSE
• NASDAQ
• CBOE (options)

Transfer Agents

Transfer agents maintain records of security ownership:

Transfer Agent Functions

Transfer agents are regulated by the SEC.

Custodians

Custodians hold securities and cash for safekeeping:

Custodian Functions

Types of Custodians

• Bank custodians — For institutional investors
• Broker-dealer custody — For retail investors
• Self-custody — Investor holds own certificates (rare)

Clearing Corporations

Clearing corporations facilitate the settlement of securities transactions.

DTCC (Depository Trust & Clearing Corporation)

DTCC is the holding company for clearing and settlement infrastructure:

Clearing Process

1. Trade capture — Record trade details
2. Comparison — Match buyer/seller records
3. Netting — Calculate net obligations
4. Settlement — Transfer securities and funds

Netting Benefits

Netting reduces the number and value of settlements:

Example: Firm A owes Firm B 1,000 shares. Firm B owes Firm A 800 shares.

• Without netting: Two deliveries (1,000 and 800)
• With netting: One delivery (A delivers net 200 to B)

Investment Advisers

Investment advisers provide advice about securities for compensation.

Adviser vs. Broker-Dealer

Registration Requirements

• SEC registration: Required if AUM > $100 million
• State registration: Required if AUM < $100 million

On the Exam

The Series 7 exam frequently tests:

• Agent vs. principal capacity and compensation
• Market maker obligations
• FINRA's role as an SRO
• Transfer agent and custodian functions
• Clearing and settlement infrastructure (DTC, NSCC)