Interpositioning


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Interpositioning

The practice of using a second broker in a securities transaction, which is considered illegal it is if used to generate additional commission.

Interpositioning

The act or practice of adding another broker-dealer to a transaction when there is no reason to do so and the extra broker-dealer does not provide a necessary service. Generally speaking, interpositioning occurs when two broker-dealers agree to insert the one into the dealings of another. This allows both to extract commissions without doing any work; obviously this is detrimental to the client because it forces him/her to pay money he/she does not need to pay. Interpositioning is illegal under the Investment Company Act of 1940, but it still occurs. Indeed, it was relatively common during the first few years of the 2000s.

interpositioning

The involvement of a third party between a broker-dealer and the best available market price that results in the customer paying a bigger markup or markdown than would have been the case if the third party had not been present. For example, Dealer A satisfies a customer order to buy a security by purchasing the security through Dealer B who in turn purchases the security from the market maker. Dealer B marks up the security to Dealer A, who then marks up the security again when selling it to the customer. Interpositioning is considered unethical by the National Association of Securities Dealers.
References in periodicals archive ?
220) The government similarly argued that interpositioning was a fraudulent scheme, and therefore a violation of Rule 10b-5 subsections (a) and (c).
Even before the issue went to the federal courts, the SEC found that interpositioning had violated Rule 10b-5, (222) Unfortunately, as these were settlement proceedings, (223) the SEC did not undertake much of a legal analysis of the situation.
A student note predating the interpositioning prosecutions states that when a specialist is trading on behalf of a customer, she has a fiduciary duty to that customer.
Finally, in an ongoing class action against specialists, the Southern District of New York suggested that knowledge by specialist firms of their employees' interpositioning was sufficient to show scienter on the part of the firms.
Interpositioning has been called arbitrage, (252) and arbitrage is generally a good thing.
One might argue that specialists have always understood that part of their income to be interpositioning income and that indeed this is what makes a firm agree to such an arrangement with an exchange.
294) This way, either there would be no interposition, or the customers would be able to take into account the interpositioning and make bids and offers that at least took interpositioning into account.
What makes the courts' decisions so hard to accept is that close analogies to interpositioning abound, and yet go unnoticed by the courts.
Similarly, interpositioning could be made to look like a classical form of insider trading by shifting the focus to the seller of the asset, whose lack of knowledge about an impending purchase by an acquirer leads her to sell her asset to the insider and lose the ability to sell her asset later at a higher price.
308) Interpositioning only differs in that, rather than holding onto the security, one simply sells it off to a guaranteed buyer, thus making money from the buyer directly, by sale, rather than indirectly, by allowing the buyer's latter purchase to push up prices.
314) The government's argument boiled down to this, since specialists owed a duty to get their customers the best price, they breached this duty by interpositioning, and the failure to disclose this breach was a fraud.
334) That interpositioning is similar to a violation of the duty of loyalty is clear from the analogous nature of interpositioning to both trading ahead and insider trading.