Commission

Commission is only relevant to an Agency contract.

Where a broker acts as Riskless Principal (or any other kind of Principal) there is NO commission: the payment we call a “commission” is just an additional fee.

Rationale:

• Agency “Commission”: In a pure agency contract, there is no direct transaction between Agent and Principal, so the only way the agent can be remunerated is by a separate “agency fee”: this is a “commission” calculated on the value of the transaction between Street and the Customer directly to which the agent is not a party.
• Riskless Principal compensation: In a riskless principal structure there are two contracts: one between Street and Dealer, and between Dealer and Principal. Therefore Dealer may extract a fee by:
  • Mark-up/Mark-down: imposing a mark up/mark down between the two contracts; OR
  • Fee: separately charge a fee, which may be labelled a “commission”.

See also

• Agent
• Principal
• Riskless principal