Dual capacity

In the context of investment, dual capacity may be used for financial institutions known as market makers, which are authorized to buy and sell shares on behalf of its clients, as well as for itself. This is known to have arisen from the events of the “Big Bang” in the United Kingdom, which took place in 1986, during the time of Margaret Thatcher. This event brought with it a number of major changes in the rules of the London Stock Exchange, and is known to have significantly improved the status of London as a financial capital. One of the defining elements of this is the move from a single to dual capacity system.

A single capacity system is one in which an entity functions either as a stockbroker or market maker. This system existed and was the only one that could be used on the London Stock Exchange before October 1986.

One of the perceived disadvantages of moving from the single capacity to dual capacity system is that since market makers are allowed to transact shares for both clients and themselves, there is a possibility that they might be shortchanging their clients in an effort to improve their own investment position. In order to avoid compromising client interests, certain provisions were set up in the dual capacity system. These basically serve to separate the client position from that of the broker.

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