Securities Trader Representative (Series 57) Practice Exam

Which of the following scenarios is NOT covered by the 5% Markup Policy?

1. Market maker's spread

2. A riskless transaction

3. A sale from inventory

4. Commission on an agency transaction

The correct answer is: Market maker's spread

The 5% Markup Policy typically addresses the fairness of markups or markdowns in transactions involving securities. This guideline is aimed at ensuring that the commissions and fees charged to customers are reasonable and transparent. When considering market maker activities, it’s essential to know that market makers are professionals who facilitate trading by providing liquidity to the markets. They do this by maintaining a continuous market for certain securities, which involves quoting both buy and sell prices. The difference between these prices is known as the spread, and it is not subject to the same constraints as markups because it is not considered a markup or markdown in the traditional sense. Instead, the spread represents a function of supply and demand dynamics in the marketplace. In contrast, the other scenarios listed, such as riskless transactions, sales from inventory, and commissions on agency transactions, involve direct charges to clients that could be susceptible to markup guidelines. Therefore, they are subject to evaluation under the 5% Markup Policy to ensure fairness and appropriateness of the fees charged.