General Securities Sales Supervisor (Series10) Practice Exam

Under which condition is a broker-dealer allowed to arrange a riskless transaction?

1. When the transaction is with a single client only

2. When market conditions are stable

3. If the transaction does not involve a markup

4. If it completes with no risk of price fluctuation

The correct answer is: If it completes with no risk of price fluctuation

A broker-dealer is allowed to arrange a riskless transaction when the transaction completes with no risk of price fluctuation. This condition is crucial because a riskless transaction implies that the broker-dealer ensures that there is a hedge or offsetting transaction to mitigate risk associated with price changes in the market. By establishing such a transaction, the broker-dealer effectively guarantees that the trade will settle at a predetermined price, eliminating any potential losses that could arise from price movements. This practice is often used in scenarios where the broker-dealer is facilitating a trade between a buyer and a seller in a manner that locks in the price, thus providing assurance to both parties. It demonstrates a compliance with regulatory standards that aim to protect investors by ensuring that the transactions do not expose them to unnecessary risks. While the stability of market conditions and the involvement of markups are relevant considerations in broader trading practices, they do not directly define a riskless transaction the way the aspect of no price fluctuation does. The essence of a riskless transaction lies in the certainty it provides against adverse price shifts, making this condition the heart of the matter.