Mark-Ups
The difference between what the market maker/broker bought the currency for on the market and what it sold the currency to the buyer. Can be done on both the bid and ask to make more money.
→ NOTE:
A broker receives commission and a dealer receives a mark up or mark down. Can be done on both the bid and ask to make more money.
→ EXAMPLE:
A dealer may decide that a markup on a security issue held in inventory is appropriate because of a rising stock market
Mark-Downs
The broker offers a lower price to try to stimulate trading in hopes that they will the money back on the extra commissions.
→ EXAMPLE:
A bond trader may take a markdown in long-term bonds held in inventory when market interest rates rise.
→ NOTE:
A markdown is the amount subtracted from the selling price, when a customer sells securities to a dealer in the over-the-counter (OTC) market. Had the securities been purchased from the dealer, the customer would have paid a markup, or an amount added to the purchase price. When broker/dealers charge a markup or markdown on a securities transaction, they are acting as principals (dealers). If broker/dealers act as agents, they charge a commission. A broker/dealer cannot charge a markup and a commission or a markdown and a commission on the same transaction.
The National Association of Securities Dealers (NASD) Rules of Fair Practice established 5% as a reasonable guideline in markups and markdowns, though many factors enter into the question of fairness, and exceptions are common. However, this is more of a guide than a rule. If a broker/dealer charges a markup in excess of 5%, s/he will have to be able to justify it based on all relevant circumstances concerning the transaction.
Study Guide >> Definitions and Terminology >> Mark-ups and Mark-downs
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