Dual-Capacity System
A dual-capacity system is a trading system in which the roles of stockbroker and stockjobber are handled by entirely separate firms. This bifurcation aims to delineate the responsibilities and prevent conflicts of interest, ensuring greater transparency and specialized services. This was in contrast to the subsequent single-capacity system, where these roles could be combined by entities known as market makers.
Key Features
- Separated Functions: In the dual-capacity system, stockbrokers and stockjobbers operate independently.
- Stockbrokers provide advice and execute trades for clients.
- Stockjobbers serve as principal market-makers, buying and selling securities from their own accounts.
- Transparency: With segregated roles, potential conflicts of interest are minimized, leading to clearer transactions and prices.
- Historical Context: This system was prominent on the London Stock Exchange until the “Big Bang” deregulation in October 1986. This reform transitioned the system to a single-capacity model where firms, now called market makers, could combine both roles.
Examples
- Pre-1986 London Stock Exchange: Here, investors dealing in securities would use a stockbroker to advise and execute orders, but the trades themselves were conducted through stockjobbers who held inventories of shares.
- Modern Equivalent (Non-UK): Some emerging markets might still exhibit elements of a dual-capacity system, ensuring a clear demarcation between advisory (brokerage) and execution/trading (jobbing).
Frequently Asked Questions
What was the main advantage of the dual-capacity system?
The dual-capacity system provided a transparent trading environment by separating advisory and trading roles, thus avoiding conflicts of interest and ensuring specialized focus in each function.
Why did the London Stock Exchange transition to a single-capacity system?
The transition aimed to increase market efficiency, reduce costs, and align with global financial markets, enhancing competition.
Can dual-capacity systems still be found in other markets?
While most major financial markets have adopted single-capacity systems for efficiency, some smaller or emerging markets might retain elements of the dual-capacity model.
Are there any disadvantages to the dual-capacity system?
Potential drawbacks include less fluid market dynamics and slower transaction times due to the necessity of routing trades through separate entities.
Related Terms
- Stockbroker: A professional who buys and sells securities on behalf of their clients. They provide financial advice but are not market-makers.
- Stockjobber: A market professional who deals in securities on their behalf, holding an inventory to facilitate trades with stockbrokers.
- Market Maker: In a single-capacity system, a firm or individual provides both advising and trading services, creating liquidity in the markets by being ready to buy and sell at all times.
- Big Bang: Refers to the major overhaul of the London Stock Exchange on October 27, 1986, which moved the market from a dual-capacity to a single-capacity system among other reforms.
Online References
Suggested Books for Further Studies
- “A Random Walk Down Wall Street” by Burton G. Malkiel: This book provides insights into the functioning of various financial markets, including historical contexts.
- “The Origins and Development of Financial Markets and Institutions” by Jeremy Atack and Larry Neal: A comprehensive look into the history and evolution of financial markets globally, including the dual vs. single-capacity systems.
- “The Big Bang: The History of Financial Deregulation in the UK in the 1980s” by Luc Greatrex: A detailed account of the Big Bang reforms and their impact on the London Stock Exchange.
Accounting Basics: “Dual-Capacity System” Fundamentals Quiz
### Prior to October 1986, which stock exchange maintained a dual-capacity system?
- [x] London Stock Exchange
- [ ] New York Stock Exchange
- [ ] Tokyo Stock Exchange
- [ ] Frankfurt Stock Exchange
> **Explanation:** The London Stock Exchange maintained a dual-capacity system until October 1986, when the Big Bang reforms were introduced.
### What primary roles were divided in a dual-capacity system?
- [x] Stockbroker and Stockjobber
- [ ] Market Maker and Portfolio Manager
- [ ] Financial Advisor and Trader
- [ ] Underwriter and Auditor
> **Explanation:** In a dual-capacity system, the roles of stockbroker and stockjobber were carried out by separate firms.
### What did stockjobbers mainly do in a dual-capacity system?
- [ ] Provide financial advice
- [x] Act as principal market-makers, buying and selling securities from their own accounts
- [ ] Manage client portfolios
- [ ] Conduct financial audits
> **Explanation:** Stockjobbers served as principal market-makers, buying and selling securities from their accounts to facilitate trades with stockbrokers.
### Why was the dual-capacity system considered beneficial for transparency?
- [x] It separated advisory and trading functions, reducing conflicts of interest
- [ ] It allowed faster transactions
- [ ] It was less costly to maintain
- [ ] It simplified regulatory oversight
> **Explanation:** The separation of advisory (stockbroker) and trading (stockjobber) functions in the dual-capacity system reduced conflicts of interest and increased transparency.
### Post-1986, what system was adopted by the London Stock Exchange?
- [x] Single-capacity system
- [ ] Tri-capacity system
- [ ] Dual-capacity system
- [ ] Multifunctional system
> **Explanation:** Post-1986, the London Stock Exchange adopted a single-capacity system, where the roles of market makers combined advisory and trading functions.
### Which financial market reform is associated with the transition from a dual-capacity to a single-capacity system?
- [ ] Deregulation Boom
- [ ] Financial Meltdown
- [x] Big Bang
- [ ] Black Monday
> **Explanation:** The Big Bang financial market reform on October 27, 1986, transitioned the London Stock Exchange from a dual-capacity to a single-capacity system.
### What was one potential drawback of the dual-capacity system?
- [ ] Increased liquidity
- [x] Slower transaction times
- [ ] Higher market transparency
- [ ] Reduced costs
> **Explanation:** The necessity of routing trades through separate entities could lead to slower transaction times in a dual-capacity system.
### Which of the following describes a single-capacity system?
- [ ] It separates advisory and trading roles among different firms.
- [x] It allows firms to combine advisory and trading roles as market makers.
- [ ] It involves no market intermediaries.
- [ ] It only exists in niche markets.
> **Explanation:** A single-capacity system allows firms to combine advisory and trading roles, typically referred to as market makers.
### Which term is closely linked with the concept of a dual-capacity trading system?
- [x] Stockbroker
- [ ] Market-Linked Notes
- [ ] Credit Default Swap
- [ ] Interest Rate Swap
> **Explanation:** Stockbroker is closely linked with the dual-capacity trading system, where they provide advice and execute trades for clients separate from the stockjobber.
### In which system could a single entity perform both advisory and trading functions?
- [ ] Dual-capacity system
- [x] Single-capacity system
- [ ] Quasi-market system
- [ ] Multi-capacity system
> **Explanation:** In a single-capacity system, a single entity can perform both advisory and trading functions.
Thank you for delving into the intricacies of the dual-capacity system and tackling our informative quiz! Continue expanding your financial acumen with diligence and curiosity.
