CH 10 SEC Trading Rules Flashcards
What is a protected quote related to the Order Protection Rule (NMS Rule 611)?
Any quotation that is immediately accessible through an automated execution system.
True or False: A volume-weighted average price (VWAP) order is usually placed by an institutional investor.
TRUE
According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than how old?
Less than 24 hours old.
On a quarterly basis, BDs must disclose their routing practices for what type of orders in NMS securities?
Non-directed orders.
When must a BD fill a client’s limit order after executing a trade for its own account at the same or better price?
Immediately (within 60 seconds).
True or False: A market maker must immediately display any client order that improves its quote.
TRUE
When may the sell order ticket be marked long for a client with a futures contract who has decided to sell stock?
When the client is notified that the futures contract will be settled resulting in delivery of shares.
What must exist for a firm’s trading desk to buy at a price that would fill a client order of another desk?
Information barriers.
Who publishes a list of all threshold securities?
A self-regulatory organization (SRO).
Is this a not-held order? “Sell some of my RST position today if the news is bad.”
No, because the client did not specify the number of shares to sell.
The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.65?
No, because a bid of $12.65 would cross the inside offer of $12.62.
What securities are included in monthly market center reports?
Nasdaq and exchange securities for which information is sent through an automated quotation system.
True or False: A sell order ticket may be marked long if the client or his agent has title to the security.
True. A BD must be in possession of a security or have reason to believe the client is long and will deliver promptly.
What must a firm do if it holds Jim’s order and buys for its own account at a price equal to or better than Jim’s?
Fill the client’s order at the same price that it received.
True or False: Under NMS Rule 611, the Order Protection Rule, a manual quotation on the NYSE floor is protected.
False. Protected quotes are those that may be immediately accessed through an automated system.
How often are the circuit breakers that are used to determine the triggering of a trading halt reset?
Daily.
True or False: Clients must provide verbal or written consent to a BD concerning payment-for-order-flow arrangements.
False. BDs are, however, required to provide disclosure of the arrangement.
The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.583?
No. If NMS stock is priced above $1.00, it may NOT be quoted in increments less than $0.01.
Without causing a regulatory violation, why may a presented order not be honored by a market maker?
Either before or at the time of order presentation, the BD executes an order and will immediately revise its quote.
Orders to sell all exchange-listed and over-the-counter equities must be marked _____ or ______.
Orders must be marked long or short.
The inside market for an NMS security is .90 - .95. At what price levels may a BD accept indications of interest?
If NMS stock is priced less than $1.00, it may be quoted in increments no less than one hundredth of a cent ($0.0001).
A market maker is quoting ABC at 21.05 - 21.35, 15 x 50. What happens if it accepts a client order to sell 500 at 21.35?
If client interest is 10% or less of the market maker’s size (de minimis), no change is made (5,000 x 10% = 500 sh.).
A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 500 at 21.35?
Assuming the market maker is at the inside, it adds the client’s interest to its displayed size (21.05-21.35, 15 x 15).
A market maker quotes a stock at 14.50 - 15.00, 3 x 5. At what price would a customer’s market order to sell be filled?
Customer market orders to sell are filled at the bid price of 14.50.
True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.
False. She must have EXERCISED the options, rights, or warrants.
A BD sends an order to Market Center A whose offer is $14.85, while Market Center B’s offer is $14.83. Is this allowed?
No. The order should be routed to Market Center B, which is quoting the stock at a superior (lower) price.
To enable them to compete with market makers, customer limit orders are subject to ________ rules.
Display rules.
A BD holds a client order to sell 500 shares at $21. What would trigger an obligation to fill the client’s order?
The BD selling from its own account at $21 or higher.
What orders are exempt from the Limit Order Protection Rule?
Orders from institutional accounts and orders of 10,000 shares or more worth at least $100,000.
As defined in the Limit Order Display Rule, what is a block-sized order?
An order for at least 10,000 shares or with a value of at least $200,000.
True or False: Under NMS Rule 610, a market center may charge participants a fee for accessing its quotations.
True; however, the fee must be reasonable.
In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?
Easy to borrow (called the locate requirement).
A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it receives a client order to buy 300 at 21.10?
If the market maker’s quote is improved, it must display the client’s interest. Its quote is now 21.10 - 21.35, 3 x 10.
True or False: SEC Rule 606 requires a BD’s quarterly order flow report to include Pink Market equities.
False. Pink Market and other OTC equities are not included.
Do-not-display requests should be ___________ and the request may be on a _______________ basis.
Documented and the request may be on a trade-by-trade basis.
What are some exemptions to the Limit Order Display Rule?
Order immediately executed, order sent to a BD or ECN that complies, block order, or customer requests ‘do not display’.
What type of order only permits discretion related to the time and/or price of execution?
A not-held order.
What is a threshold security?
A reporting company’s stock that has substantial fail-to-deliver positions in existence for 5 consecutive business days.
Describe payment-for-order-flow.
A BD practice of providing monetary incentive (cash, rebates, or discounts) for routing orders to a BD or exchange.
What step is required if a fail-to-deliver position has been open for 13 consecutive settlement (business) days?
Mandatory close-out.
True or False: Firm at the inside market receives a client limit order equal to the firm’s quote must add to its size.
True. It must increase the size of its quote, unless de minimis (order size is 10% or less of MM’s current size).
What must exist for the Manning Rule to not apply to other trading desks of a BD?
Information barriers.
True or False: Order-routing disclosure requirements apply to all reporting parties.
True. Both market makers and order-entry firms must provide disclosures.
To mark a sell order ticket long, any options, warrants, or rights owned must have been __________ before the sale.
Exercised before the sale.
If a BD receives a client order to sell 20,000 BBB at $54, when may its proprietary trader sell BBB at the same price?
When the firm implements a system to prevent the misuse of information regarding client orders (information barriers).
What is calculated between a beginning and ending period, based on an average of trades executed during that period?
The volume-weighted average price (VWAP).
The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.58?
Yes. The BD’s bid at $12.58 would serve to narrow the spread.
Block trades of ________shares or more, or $___________ or more, are exempt from the Limit Order Display Rule.
10,000 shares or more, or $200,000 or more.
If client consent is obtained, a firm may trade along with a client at the same price with what types of client orders?
Orders designated as not-held for institutions or with large orders (10,000 sh. or more with value of at least $100,000).
Is this a not-held order? “Buy 500 shares of XYZ this morning if it looks good.”
Yes.
Sell order tickets are marked long when clients have unconditional contracts to buy, but the trades have not ________.
Settled.
When is a VWAP order entered?
Prior to the determination of the actual price; therefore, the BD guarantees the VWAP as of a certain period.
To whom and when must the routing firm disclose details of any payment-for-order-flow practices?
Clients must be informed in writing at the opening of an account and annually thereafter.
NMS Rule 612 generally prohibits market participants from displaying orders in pricing increments of less than ________.
One cent.
How is the volume-weighted average price (VWAP) calculated?
By totaling the dollar value of each trade (shares x price) divided by total number of shares traded over a given period.
A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 700 at 21.30?
If the market maker’s quote is improved, it must display the client’s interest. Its quote is now 21.05 - 21.30, 15 x 7.
Describe a non-directed order.
An order that does not have a specific market center designated by the client and is chosen by the BD.
To be considered a threshold security, excessive fails-to-deliver must occur for how many consecutive settlement days?
5 consecutive settlement days.
A client who is long 500 shares of ABC enters a single order to sell 600 shares of ABC. Is this a short sale?
Yes. If entered on one ticket, the client is net short 100 shares.
What steps are required for a firm to obtain an exception from the Customer Limit Order Protection Rule to apply?
Before an order is accepted, it must obtain client consent and it must disclose that it may potentially trade ahead.
True or False: Non-displayed orders are NOT subject to price protection rules.
FALSE
A BD holding a client’s buy limit order is required to fill the client’s order after doing what for its own account?
Buying at the same or lower price for the firm’s account.
True or False: Market makers are exempt from the borrowing requirement of Regulation SHO.
FALSE
A client who is long 500 shares of XYZ and short 600 shares of XYZ is net short how many shares?
100 shares.
What does the Order Protection Rule (NMS Rule 611) prohibit?
A market center’s ability to trade-through the best (protected) quote in an automated market.
For NMS stocks priced at $1.00 or greater, what access fee may market centers charge market participants?
$0.003 per share.
What is the purpose of Regulation SHO?
To regulate the practice of selling short.
Explain the Trade Ahead Exception to the Firm Quote Rule which allows a market maker (MM) to not honor presented orders.
An MM executes an order either before or at the time of presentation and revises its quote immediately upon completion.
What does Regulation SHO regulate?
Short sales.
To not violate the Firm Quote Rule, when must a market maker have communicated a change to its quote (price or size)?
Prior to the presentation of an order.
For NMS stocks priced at less than $1.00, what access fee may market centers charge market participants?
0.3% of the dollar value of the quote.
How often must BDs publish reports summarizing their order routing practices?
Quarterly.
Though acting in good faith, a customer sells securities, but does not deliver. When must the BD close out the trade?
All fails-to-deliver must be closed out within 35 calendar days.
Rather than displaying an order, what alternatives are available to firms?
Execute it upon receipt or deliver it to an ECN or another firm that is complying with the Limit Order Display Rule.
To be a threshold security, how many shares must be in a failing position?
10.
When must a BD close out a trade if a customer sells securities but does not deliver?
All fails-to-deliver must be closed out within 35 calendar days.
What alternatives are available to firms instead of displaying an order?
Execute it upon receipt or deliver it to an ECN or another firm that is complying with the Limit Order Display Rule.
How many shares must be in a failing position for a security to be considered a threshold security?
10,000 shares or more.
Is the sale of 1,000 shares of ABC stock by a client who is long ABC call options a short sale?
Yes. For the sale to be marked long, the options would need to be exercised prior to the sale of the stock.
What is it called when a client designates a specific market center for order routing?
It is a directed order.
How do you calculate the VWAP if 6,700 shares traded with a total value of $268,536?
$268,536 ÷ 6,700 shares = $40.08.
Is there an exception available under the Manning Rule for a client order to buy 10,000 shares for $12.50 per share?
Yes. Trade exceptions may apply for large orders (10,000 shares or more and a dollar value of at least $100,000).
What are the two ways order tickets can be marked when selling securities?
Long (selling shares that are owned) or short (selling stock that is being borrowed).
True or False: The Order Protection Rule (NMS Rule 611) only applies during extended trading hours.
False. The Order Protection Rule applies during normal trading hours (9:30 a.m. to 4:00 p.m. ET).
Who can place not held orders?
Not held orders may be placed by both retail and institutional customers.
True or False: Market makers are prohibited from trading ahead of customer limit orders.
TRUE.
What is the violation for a market maker failing to honor its firm quote?
Backing away.
True or False: A request to not display an order must be individually negotiated with the client.
TRUE.
True or False: The Locate Requirement of Regulation SHO applies when a sell order ticket is marked long or short.
False. The Locate Requirement only applies when a sell order ticket is marked short.
If a client is long 500 shares of ABC and short 400 shares, what is their net long position?
A client is only net long 100 shares.
How does NMS Rule 611, the Order Protection Rule, seek to prohibit trade-through practices?
By requiring a market center to route orders to the automated market displaying the best price.
True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.
False, the convertibles must already have been TENDERED for conversion.
What is the practice called when a BD sends client orders to an exchange for execution and is rebated for executed trades?
Payment-for-order-flow.
What would trigger a BD’s obligation to fill a client’s order to buy 500 shares at $15?
The BD purchasing for its own account at $15 or lower.
True or False: Trade confirmations must disclose details of trades effected through a payment-for-order-flow agreement.
TRUE.
What is considered a large order under the Customer Limit Order Protection Rule?
10,000 shares or more unless the dollar value is less than $100,000.
What information must be included in a BD’s quarterly routing report?
The security (NYSE, AMEX, Nasdaq, or option) and the market center to which the orders are routed.
How should Sally mark her sell order ticket after converting her XYZ bonds?
The order ticket may be marked long.
True or False: Do-not-display requests may NOT be entered by clients.
FALSE.
At what price would a customer’s market order to buy be filled if a market maker quotes a stock at 14.50 - 15.00?
Customer market orders to buy are filled at the ask price of 15.00.
What type of reports are market centers required to create regarding order execution quality?
Market centers are required to create monthly reports disclosing the measures of the quality of order execution.
Where is a BD required to post its order routing information?
On its Web site, free of charge and accessible to the public.
How many shares must a market maker fill at the bid price if quoting stock at 14.50 - 15.00?
The market maker is obligated to fill a minimum of 300 shares.
Will a market maker’s quote change upon receipt of a client order to buy 300 shares at 17.42 if quoted at 17.40-17.45?
Yes, it changes to 17.42 - 17.45 3 x 7.
What does the Manning Rule relate to?
Customer limit order protection.
True or False: A market maker publishing a firm quote is obligated to honor the price and the number of shares quoted?
True. A BD providing a firm quote is obligated to honor both the price and size displayed.
Under the Limit Order Display Rule, how quickly must orders that improve the market maker’s quote be displayed?
Immediately, but no later than 30 seconds.
How long must fails-to-deliver in threshold securities exist before they must be closed out?
Fails-to-deliver must be closed-out after 13 consecutive settlement days.
Does a sell order of 300 shares of XYZ today if it starts to rise require prior discretionary authorization?
No, this is a not held order.
When does the obligation to comply with the Customer Limit Order Protection Rule apply?
During both normal and extended trading hours and when orders are sent to an ECN (or other entity) for execution.
Can a BD accept a client order to buy an NMS stock at $.956?
Yes. For NMS stocks that are priced less than $1.00, orders may be accepted at up to four decimal places.
How often must market centers publish reports of the efficiency of executions?
Monthly.
