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
2 Comments
On my exam I had 2-3 questoins asking me about mark ups. They woudl give a bid and offer and ask you what a client would purchas after a mark up.
Example:
A FDM offers a 2 pip mark up. The brokers EUR/USD rates are
1.2925/1.2927. After the mark up what price would a customer buy at?
One question was flawed though and didnt specify the pair. Only saying the swiss franc is trading at 1.2924/1.2926. If the pair was marked up 4 pips what would it be avaiblabe to buy the Swiss Fanc at?
Problem is this question does say it is the USD/CHF or CHF/PLY so there is now way to know if you would be selling or buying the pair to buy the CHF. This question was very unclear.
One Trackback
[...] Mark-ups, mark-downs [...]