Securities Trader Representative (Series 57) Practice Exam

To whom does a broker-dealer typically sell securities in a riskless principal transaction?

1. A different broker-dealer

2. The original issuer of the securities

3. The client who initiated the order

4. A financial regulatory authority

The correct answer is: The client who initiated the order

In a riskless principal transaction, a broker-dealer typically sells securities to the client who initiated the order. This type of transaction occurs when the broker-dealer does not take on market risk when executing the client's order. Instead, the broker-dealer acts as an intermediary: they first buy the securities from the market or another party to fulfill the client's order and then sell those securities directly to the client. This structure ensures that the client receives the securities they requested without the broker-dealer being exposed to the changes in the market price of those securities. The broker-dealer stands between the market and the client, facilitating the transaction and ensuring that the client’s order is executed accurately and efficiently. The other options involve parties that are not typically involved in a riskless principal transaction as defined. A different broker-dealer does not receive securities directly in this type of transaction, the original issuer of the securities would not be a buyer for transactions mediated by a broker-dealer in this context, and a financial regulatory authority does not engage in buying or selling securities in the market in this manner. Therefore, the correct answer is aligned with the operational mechanics of riskless principal transactions, underscoring the role of the broker-dealer in executing client orders without assuming