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Definition: Interpositioning

Interpositioning is a malpractice followed in the financial markets where a third party broker, other than the main broker, becomes a part of the securities transaction to get an additional fee or income from the customer.

Interpositioning is an act or practice through which another broker-dealer is added to a transaction for no reason and there is no service provided by the extra broker. It happens when there is an agreement between the two brokers to enter into the dealings of another, and both are given commission even though they provide no work. It is unfavorable for the client and is termed illegal under the Investment Company Act of 1940. 

It is an illegal practice to earn additional commission by the use of a second broker. It can be illustrated by an example wherein a Dealer X gets a customer to purchase a security through dealer. Y and. Y purchases the security from the market maker. Dealer Y adds a markup to the security and provides it to Dealer X who further adds a markup to the security again and sells it to the customer. Thereby extra commission is earned and it’s a loss to the customer.

Hence, this concludes the definition of Interpositioning along with its overview.

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