Confused about S&T while studying for FINRA exams - can someone help out?

Studying for the FINRA exams right now, but getting even more confused at how S&T does business. I'd love it if someone from inside the business could explain couple things for me as I usually learn better by actually understanding rather than rote memorization.

Broker-dealers, i.e. banks, can execute trades either as a broker or a dealer. Seems like brokers are agency traders (I'm guessing sales traders in this case because no book) and dealers are market-makers because you trade with the clients / counterparties through your own book (inventory). With a hidden profit violation rule, you cannot charge both commission (broker) and mark down / up (dealer) on a trade. However, don't salespeople and traders make money by charging a commission and earning a profit on trades, respectively? Is it that S&T is set up so that salespeople are brokers and traders are dealers, where salespeople "match" the counterparty to their own trader? Being in the same firm though, wouldn't this still be a hidden profit violation? 

Also, if dealers have their own book, i.e. use firm capital, isn't this considered prop trading and be a violation of the Volcker Rule? I also understand that some speculation is allowed, but if I were to speculate on a certain asset and sell them to a client after the price has appreciated, wouldn't this be front-running? Even before that, wouldn't speculation itself be against the Volcker Rule? 

Lastly, S&T clients include institutional investors. They have their own researchers and traders there though, so what is the need to pay a bank for their S&T services, other than, say, for prime brokerage? With electronic trading platforms on the rise (or even back when Bloomberg Terminal was all there was), wouldn't institutional investors trade directly on the platform? 

Really appreciate anyone who can help me understand the structure and system behind S&T better. 

Comments (3)

Jul 29, 2022 - 1:03am
throwaway5555, what's your opinion? Comment below:

Bump, looking to see what kind of response comes from this

Jul 29, 2022 - 8:52am
Laser44, what's your opinion? Comment below:

Firms have to make a market so when there isn't a buyer on the other side, to maintain liquidity a firm will use their own capital. This is different than the volcker which primarily is against just speculating for the sake of speculating. These days, firms will justify taking the other side and justify rationale as hedging or RENTD (reasonable expected near term demand). The lines are definitely blurred, but the days of outright speculating like what the volcker rule prohibits are over. 

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  • Associate 2 in S&T - Other
Jul 30, 2022 - 2:29am

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