Securities Trader Representative (Series 57) Practice Exam

What is the role of a broker-dealer in a riskless principal transaction?

1. To act solely on behalf of the client

2. To purchase securities for their own account and then sell to the client

3. To provide liquidity in the market

4. To serve as an intermediary without taking ownership

The correct answer is: To purchase securities for their own account and then sell to the client

In a riskless principal transaction, the broker-dealer plays a specific role where they purchase securities for their own account and then sell those securities to the client. This mechanism allows the broker-dealer to facilitate a trade while managing the risk by ensuring that the price paid by the client is set in a way that covers the cost of the initial purchase. The characteristics of this transaction model enable the broker-dealer to effectively manage execution risks and market fluctuations by acting in a direct capacity. The transaction typically occurs when the broker-dealer anticipates that they can sell the securities at a profit without exposing themselves significantly to market fluctuations since they intend to quickly pass the securities onto the client after the initial purchase. This method also allows clients to benefit from the broker-dealer’s capability to access securities quickly, and at times may help in achieving better pricing than if the client were to buy directly on the market. The other options do not align with the specific functions executed by broker-dealers in this context. Acting solely on behalf of the client ignores the broker-dealer's dual role of handling their own account as well. Providing liquidity in the market is broader and not exclusive to riskless principal transactions. Serving as an intermediary without taking ownership would imply that the broker-de