Interpositioning
Interpositioning is the prohibited practice of inserting an unnecessary third party, such as another broker-dealer, between a customer's order and the best available market, adding cost without benefit to the customer.
Interpositioning occurs when a broker-dealer places another firm between a customer and the best market for a security when doing so serves no purpose for the customer. Each intermediary in a trade earns compensation — a commission or a markup — so an unneeded middleman simply raises the customer's cost or worsens the price received.
For example, suppose a customer asks a broker-dealer to buy a stock that trades most actively on a particular exchange. Instead of routing the order there directly, the firm sends it to an affiliated dealer, which then executes on the exchange and adds its own markup. The customer ends up paying two layers of compensation for an execution that required only one. The extra step benefited the firms, not the customer.
Interpositioning violates the duty of best execution — the obligation to seek the most favorable terms reasonably available for a customer's order. FINRA treats it as an unethical, prohibited practice unless the firm can show the arrangement actually improved the price or execution quality for the customer. Regulators view it alongside other manipulative or deceptive conduct like churning and front-running.
The SIE exam covers interpositioning in its prohibited activities material, and the Series 9 revisits it in the context of supervising sales practices and market conduct. For either exam, remember the core test: an intermediary added between the customer and the best market is only permissible when it benefits the customer.
Key takeaways
- Interpositioning inserts an unnecessary third party between a customer and the best market for a trade.
- The practice adds an extra layer of commissions or markups that the customer ultimately pays.
- It violates the broker-dealer's duty of best execution and is prohibited by FINRA rules.
- An intermediary is only acceptable when its involvement demonstrably benefits the customer.