CH 11 SRO Reporting Flashcards
If a pricing error occurs when reporting a trade, what price is the client obligated to accept?
The actual price.
What steps should be taken when an RR executes a trade but uses the wrong account number?
Do a cancel and re-bill. Transfer the trade to the correct account number with permission of a supervising principal.
Along with the stock’s price, what orders are reduced on the ex-dividend date?
Buy limit and sell stop orders.
True or False: The 5% Policy is based on the dealer’s inventory cost on a security.
False, it is generally based on the inside market price.
Name a type of transaction that is exempt from FINRA’s Debt Markup Policy.
Transactions in municipal securities.
True or False: Some transactions may justify a markup higher than 5%, while for others, 5% may be too high.
TRUE.
To prevent rogue trading, a BD may limit an employee’s access to only trading systems that are ____________ to his job.
appropriate to his job.
According to the Department of Justice, what activities of BDs would not be considered collusive?
Executing some trades outside of the inside market or executing large block trades outside of normal hours.
If a new market maker enters a quote with the bid equaling the lowest asked price, what is the market status?
The market is locked.
A firm splits a 1,000-share order into ten 100-share orders to increase its rebates. What is this called?
Trade shredding (a violation).
What happens to a customer’s order if there is a reverse split in the stock?
Orders are cancelled if there is a reverse split.
May a BD delay the reporting of trades based on requests made by another market maker?
No. The Department of Justice considers this a prohibited practice.
True or False: A riskless or simultaneous transaction is subject to the 5% Policy.
TRUE.
The 5% policy is a __________, not a _____ for dealing with commissions and markups.
guideline, not a rule.
Trades involving U.S. government securities, effected by any type of client, are _______ from the debt markup policy.
exempt from the debt markup policy.
A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
market order.
What is exempt from the 5% policy?
Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds.
According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, how long will trading halt?
For 15 minutes.
According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, how long will trading halt?
For 15 minutes.
True or False: The capacity in which the firm is acting in a transaction is found on the order ticket.
False. Firm capacity is found on the confirmation.
A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
limit order.
When is interpositioning acceptable?
When the member firm is able to demonstrate that the execution was advantageous to the client.
A BD is not responsible for errors that are the _________ fault.
client’s fault.
Sales of new issues and mutual funds and trades between members are _______ from the 5% policy.
exempt from the 5% policy.
For an order to NOT be adjusted, it must be marked ________________.
Do Not Reduce (DNR).
List some of the factors considered when attempting to obtain best execution.
Size/type of transaction, number of markets checked, accessibility of quotes, terms/conditions of the order.
A ________ state occurs if the NBB is below the lower band or the NBO is above the upper band, but not in a limit state.
straddle state.
Give some examples of BD practices that are prohibited according to the Department of Justice.
Sharing client order information, selectively backing away from quotes, coordinating prices with other market makers.
True or False: An order ticket will indicate if an order was discretionary, solicited, or unsolicited.
TRUE.
True or False: Crossing or locking a market is an accepted practice employed by market makers.
False. Crossing or locking a market is prohibited.
True or False: If a client accidentally makes an online purchase of the wrong security, the BD will cancel the trade.
False. If the error was caused by the client, the BD is not responsible.
If a company executes a reverse stock split, what happens to all open orders?
The open orders will be cancelled.
A BD receives a large buy order from a client. When may the BD execute a trade for the same stock in its own account?
After the client’s trade is reported on the Tape.
True or False: NYSE members may act as agent for both the buyer and seller in a transaction.
True. Acting as a dual agent in a cross transaction is acceptable.
If a client’s order to buy XYZ at $50 is actually filled at $50 plus a $.25 commission, may the client refuse the trade?
No. The trade was executed at the price designated by the client.
If the highest bid is above the lowest ask, what is the market status?
The market is crossed.
True or False: An order ticket will identify the broker on the other side of the trade (contra broker).
FALSE.
Is it possible for a quote on a manual market to lock or cross a quote found on an automated market?
Yes, but crossing or locking a market is prohibited.
Identify the acronym: LULD.
Limit UP-Limit Down.
True or False: Traders exceeding the daily parameters set for the value or number of trades may indicate rogue trading.
TRUE.
True or False: A memorandum of each trade must show the terms of the transaction along with any modifications.
True. Trade tickets will also show the account name or number and the person accepting the order.
True or False: Proceeds transactions are subject to the 5% Markup Policy.
TRUE.
What are the three orders that are reduced on the ex-dividend date?
Buy Limits, Sell Stops, and Sell Stop Limits (unless marked DNR).
A BD receives a client order to sell 20,000 ABC at $38. May a trader buy 10,000 ABC at $38 for the BD’s account?
Yes. Since the proprietary trader is on the opposite side of the market, no prohibition applies.
What may be implemented by a BD to prevent rogue trading?
Mandatory vacations for a minimum time for traders or using multiple passwords to gain access to certain systems.
In CQS, what is the penalty if a market maker fails to provide timely quotes for a security?
A one-business-day suspension from market making in that security.
What events may cause the prevailing market for a debt security to be different than contemporaneous cost?
A change in issuer’s credit rating, a change in market interest rates, or significant news reports about the issuer.
Shares were mistakenly bought in a client’s account. Who is authorized to place the shares in the firm’s error account?
The firm’s principal.
For LULD rules, if the NBB is on the upper band or the NBO is on the lower band, what is the market state?
The market is in a limit state.
True or False: Rogue trading may result in significant financial benefits for a BD.
False. Rogue trading may result in large financial losses for a BD.
For debt transactions, how is markup generally determined?
It is based on the dealer’s contemporaneous cost.
True or False: The number of market makers for a security is a key consideration when determining best execution.
FALSE.
____________________ is the insertion of a third party between a customer and the best market price.
Interpositioning.
Bill’s market order to buy is effected at 21.21. However, it is reported to Bill at 21.12. What price is binding?
Bill must accept the execution price of 21.21.
A company makes a payment to a market-making firm as a thank you for publishing quotes. Is the payment permitted?
No. Making payments to a market maker creates a conflict of interest.
True or False: Under Limit Up-Limit Down rules, a trading pause may occur if a security enters a straddle state.
True.
True or False: LOC orders are to be executed at the close only if that price is at or better than the set limit.
TRUE.
ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 14.90 - 15.25?
Yes. The market maker would be narrowing the spread to 15.15 - 15.25.
Under LULD rules, failure to exit the limit state within 15 seconds results in a ____ minute trading pause.
five minute trading pause.
What is the first priority used by a dealer when determining the markup on debt securities?
The contemporaneous cost of the dealer.
True or False: For principal trades, commissions must be disclosed.
False. Principal trades charge a markup or markdown which must be disclosed on the confirmation.
What concern would a firm have if a trader repeatedly requests that the firm’s internal controls be relaxed?
That the trader is engaging in rogue trading.
Where would Do Not Reduce (DNR) instructions appear?
On the order ticket.
What transactions are exempt from the debt markup policy?
Those involving municipals (any grade) or other exempt securities (Treasuries), or QIBs buying non-investment-grade debt.
A markup is generally based on the _______ market, but not the ____________.
inside market, but not the dealer’s cost.
Define a proceeds transaction.
A client directs her BD to liquidate securities and use the proceeds to buy other securities.
What trades would be covered by the 5% policy?
Secondary market trades of stocks, corporate bonds, and Treasuries.
Bill directs his BD to sell his $10,000 of ABC and use the proceeds to buy $10,000 of XYZ. What type of trade is this?
A proceeds transaction.
Where would a firm disclose whether an order was solicited or unsolicited?
On the order ticket (not the confirmation).
On a net basis trade, BD capacity is reported as __________ on the confirmation, but _______ is NOT disclosed.
principal, but markup is NOT disclosed.
If contemporaneous cost is not used to determine a debt security’s markup, what method would be the least important?
An economic model developed by regulators of the bond market (this is a last resort method).
If a quantity error occurs when filing a trade, what is the client’s obligation?
The client is only obligated to accept the desired quantity.
True or False: National best bids below the Limit Up-Limit Down lower price band are non-executable.
True.
If a firm makes an error in executing a client order, who must be consulted to correct the error?
A principal must be consulted to correct the error.
True or False: Executing a client’s trade outside of the U.S. would be an acceptable use of interpositioning.
TRUE.
In a proceeds transaction, on how many trades is the markup based?
Only one trade (as if the trade was done for cash).
How long will a GTC Limit order remain on the Display Book?
Until executed or cancelled by the customer.
True or False: To effect net basis trades for institutional clients, a BD may depend on a negative consent letter.
TRUE.
True or False: Having unrealized profits or losses on unsettled trades may indicate rogue trading.
TRUE.
True or False: Since the two legs of a net basis trade have different prices, both sides must be reported as principal.
TRUE.
Name 3 factors that may be used when determining the markup of a security under the 5% Policy.
1) Type of security, 2) Price of security, 3) Availability of the security in the market.
Ms. Gray places an order to buy 1,000 shares of ABC. What must the BD obtain to fill her order on a net basis capacity?
Ms. Gray’s written consent must be obtained prior to executing the trade.
Name 3 factors that may be used when determining the markup of a security under the 5% Policy.
1) Type of security, 2) Price of security, 3) Availability of the security in the market
What must the BD obtain to fill Ms. Gray’s order on a net basis capacity?
Ms. Gray’s written consent must be obtained prior to executing the trade.
When will trading exit the limit state?
Trading will exit the limit state if all limit state quotations are executed or cancelled within 15 seconds.
Define prevailing market (contemporaneous cost) as used in the debt markup policy provisions.
When a trade involving the same security has occurred at a time close to the dealer’s trade.
What is the markup if a client sells $10,000 of MBRT and uses the proceeds to buy $10,000 of TNLN and is charged $850?
The markup is 8.5% ($850 ÷ $10,000 = 8.5%).
How long will a Day Limit order remain on the Display Book?
Until executed or the end of the day (if unexecuted).
What happens to a client’s MOC order if the market closes early due to extreme market conditions?
The order is cancelled and the client is notified.
True or False: To be exempt from the debt markup policy, municipal bond trades must involve only investment-grade debt.
False. The municipal bond trades may include both investment and non-investment-grade debt.
Is a market maker permitted to unilaterally set its own bid and ask?
Yes. These activities are not in violation of FINRA or Nasdaq rules.
What must decline by a specific percentage to trigger a trading halt?
The S&P 500 Index.
If the highest bid equals the lowest ask, the market is __________.
If the highest bid equals the lowest ask, the market is locked.
What must be disclosed for agency trades?
For agency trades, commissions must be disclosed.
Is a net basis trade reported to FINRA as one or two transactions?
It is reported as two separate transactions.
True or False: Whether the firm will profit on a transaction is a key consideration when determining its markup.
FALSE
When is a firm generally prohibited from entering proprietary orders?
If the firm knows of an unexecuted client order on the same side of the market that may be executed at the same price.
True or False: A 200-share trade of MSFT on Nasdaq is subject to the 5% policy.
True, the 5% Policy covers trades executed in the secondary market.
Define contemporaneous cost (used when no competitive market exists).
The price one BD will pay another BD for a security at the time of a client’s trade.
What are the different methods of obtaining consent from an institution for executing net basis trades?
BDs may obtain oral or written consent prior to each net basis trade, or depend on a negative consent letter.
For what reasons would a firm use its error account?
If the firm or one of its RRs executed a trade involving the wrong security/quantity or on the wrong side of the market.
True or False: Market makers may accept payment from issuers for providing market-making services.
FALSE
True or False: National best offers below the Limit Up-Limit Down upper price band are non-executable.
False. An NBO below the Limit Up-Limit Down upper price band is executable.
What does the Best Execution Rule require a member firm to do?
Use reasonable diligence to obtain the best price possible for a client.
What is a riskless/simultaneous principal transaction?
A BD buys a security to fill an existing client order.
To comply with the Best Execution Rule, is a BD always required to obtain the best market price available for clients?
No. However, BDs are required to use reasonable diligence to obtain the best price possible.
True or False: If an RR executes a trade in error, the trade goes into the RR’s error account.
False. Firms, not RRs, maintain error accounts.
If not using contemporaneous cost, what are the three factors a BD may use to determine fair value on a bond trade?
Recent prices of trades between dealers, interdealer quotes, and prices of equivalent securities.
What action would be prohibited for the market maker while holding a large block order to buy from a client?
Executing an order for its own account in an option on the security (front-running violation).
Define trade shredding.
Splitting clients’ securities orders into multiple smaller orders to maximize payments or rebates to the member.
What factors should be considered when determining the markup on a transaction?
The security involved, its availability, its price, the total money involved, and the pattern of markups.
True or False: A quote on an automated market may NOT lock or cross a quote on another automated market.
True. Crossing or locking a market is prohibited.
For Limit Up-Limit Down rules, where are upper and lower price bands set?
For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s reference price.
True or False: Executing trades at prices that cannot be explained by market forces is prohibited.
TRUE
What happens to market- and limit-on-close orders if a regulatory halt is imposed?
If a regulatory halt is imposed, market- and limit-on-close orders are cancelled.
What practice is prohibited regarding discouraging other market makers?
Discouraging other market makers from narrowing the spread is a prohibited practice.
If a new market maker enters a quote with the asked price lower than the highest bid, what is the market?
If a new market maker enters a quote with the asked price lower than the highest bid, the market is crossed.
What may a BD do if it receives an unsolicited client order to sell 100 shares during a trading halt?
Nothing, since no transactions may be executed during a trading halt.
What price must a client pay if their buy order was executed at $30, but reported at $29.90?
The client must pay the actual execution price and the BD will send the customer a correcting confirmation.
In absence of a prevailing market price, what is used in determining the markup on corporate bonds?
In absence of a prevailing market price, contemporaneous cost is used in determining the markup on corporate bonds.
What must be obtained prior to executing each net basis trade for a noninstitutional client?
Written consent on an order-by-order basis.
What is the nature of a trade if a firm buys 1,000 shares of ABC at $20 and sells them to a client at $20.50?
It is a net basis trade (the markup is not required to be disclosed).
True or False: If executed, MOC orders receive the closing price.
TRUE
When a firm dominates or controls the market for a security, on what is a markup based?
The firm’s contemporaneous cost.
Is it acceptable for BD 1 to give a client order to BD 2 to execute with extra costs passed to the client?
No. This is interpositioning and is not advantageous to the client.
Is it a violation for a BD to buy ABC calls for itself before executing a buy order it is holding from an institution?
Yes. The violation is referred to as front-running.
Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?
Both.
Is a negative consent letter allowed for effecting net basis trades for noninstitutional clients?
No. Negative consent letters are only allowed for institutional clients. Noninstitutional clients must provide written consent.
What happens if the S&P 500 falls by 20% from the previous day’s close?
Trading halts for the remainder of the day.
Refusing to trade with another BD that engages in competitive activities is a violation of what provision?
FINRA/Nasdaq’s Anti-Intimidation and Coordination Interpretation.
What is it called when executing a series of trades at the end of the day to manipulate the price of a security?
It is called marking-the-close.
True or False: If a trading halt is initiated for an OTC equity, the trading or publishing of a quote is prohibited.
TRUE
What is unauthorized trading by a registered person also referred to as?
Unauthorized trading by a registered person is also referred to as rogue trading.
True or False: Accumulating an inventory position based on anticipation of a research report is a prohibited practice.
TRUE
Can a new market maker enter a quote of 14.40 - 14.90 if ABC’s inside market is 15.15 - 15.40?
No. The 14.90 offer would cross the high bid of 15.15.
Where would information regarding an order’s time of entry and execution be found?
On the order ticket.
True or False: Regardless of the trading system used, if a regulatory halt/suspension is imposed, trading must cease.
TRUE
Define a riskless principal transaction.
One in which a BD buys or sells stock on a principal basis and fills an existing client order at the same price.
Define net basis trade.
One in which a BD buys or sells stock on a principal basis and fills an existing client order at a different price.
What must a U.S. BD do if U.S. trading is halted for a stock listed in the U.S. and on a foreign exchange?
Cease quoting and trading the stock in both U.S. and foreign markets.
What does FINRA’s 5% policy address?
FINRA’s 5% policy addresses transactions executed in the secondary market.
What is interpositioning?
The placement of another BD between a customer and the best market.
What do the Limit Up-Limit Down (LULD) rules address?
The Limit Up-Limit Down (LULD) rules address sudden price movements in NMS stocks.
True or False: If XYXY is currently under a trading halt, a firm may only execute institutional orders for XYXY.
False. During a halt, no orders may be executed.
Can a new market maker enter a quote of 15.40 - 15.75 if ABC’s inside market is 15.15 - 15.40?
No. The high bid (15.40) and the low offer (15.40) would be the same price, resulting in a locked market.
List some indicators that a BD’s associated persons may be engaging in rogue trading.
Trading without approval in a product outside their expertise or an unusual pattern of cancelled trades by traders.
