Markups in equity securities deemed to be less than active and competitive

Abstract

Over the last ten or 15 years, there has been a fundamental change in focus in the regulation of the broker/dealer community in the USA. While examination of a firm's net capital compliance is still undertaken by the various self regulatory organisations (SROs), the scrutiny over sales practice compliance has increased greatly. Perhaps the single greatest area of importance in sales practice compliance is that of remuneration charged by an executing broker/dealer (B/D). While computation of commissions, markups and markdowns in actively traded equity securities is relatively straightforward, the methodology used for securities not deemed to be active and competitive is more detailed. This paper attempts to assist in identification of such securities, explain the calculations involved in the computation of proper commissions, markups, and markdowns of such securities, and lastly, provide guidance in maximising profit margins in the trading of securities which may tend not to be so actively traded, while at all times remaining in compliance with applicable regulations. The scope of this paper is limited to equity securities (shares, units, rights and warrants of stock trading in the US securities markets) the most important of which are the Nasdaq SmallCap Market and those non‐Nasdaq markets where less active securities often trade.

Citation

Sergio, J. (1997), "Markups in equity securities deemed to be less than active and competitive", Journal of Financial Regulation and Compliance, Vol. 5 No. 4, pp. 319-326. https://doi.org/10.1108/eb024941