Series 7: 17.6.4.3. Net Basis Transactions

17.6.4.3. Net Basis Transactions

A net basis transaction is a riskless principal transaction in which a market maker receives an order to buy an equity security that it either does not have in its inventory or that it knows it can buy for a lower price on the market. The market maker then purchases the security on the market and fills the order at the stated price, which is higher than the price the market maker paid for the security. A net basis transaction could also be a transaction in which the market maker receives a sell order, and rather than buying the security from the customer directly, it first sells to another broker-dealer at a higher price and then replenishes its inventory by buying from the customer at the lower price.

Prior to executing such a transaction, the broker-dealer must provide disclosure and obtain the customer’s consent. Permission is needed on such transactions be