A reduction to the price at which a broker-dealer sells securities out of its inventory, as a negative compensation for its role as a principal in the trade, selling securities directly out the inventory it holds. Acting in a principal capacity, the broker-dealer will be worse off selling a security at a price lower than the market price.
Markdown = market price – broker-dealer’s price
A markdown captures the difference between the highest current bid price among broker-dealers for a security and a lower price that a broker-dealer charges a customer. This situation may sometimes arise due to broker-dealers’ desire to offer lower prices to catalyze trading. Losses relating to the markdown (negative spread) may be covered by means of charging extra commissions.
The opposite scenario that involves selling a security at a price higher than the market price (in which case it is called a markup).
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