Chapter 10 Improvement Areas

Question 1

Introducing broker-dealers that give up all of their customers order executions to a clearing firm, their requirements:

Answer 1

• conduct periodic and rigorous reviews of executions.
• would NOT be required to get annual certs from clearing firms or obtain monthly statements with regard to best bid or offer.

Question 2

Member firm / NASDAQ market makers reporting obligations:

Answer 2

• file reports MONTHLY with regards to execution quality
• disclose order routing info. required to publish this quarterly.
• requires BD acting as agent to disclose in writing upon opening a new account and annually thereafter the firms policies with payment for order flow and firms policies for determining where to route customer orders

Question 3

Customer orders that are excluded from report obligations for member firms/nasdaq market makers:

Answer 3

• equity options having market value of at least 50k

- equity securities having a market value of at least 200k

Question 4

Mark ups/mark downs are computed based on:

Answer 4

• mark ups: best ask price available

- mark downs: best bid price available.

Question 5

Proceeds transactions & how mark ups apply to them

Answer 5

• when customers sell a security in order to have the funds they need to purchase a different security on the same day
• mark up must be based on the combined transactions, not the buy and sell separately

Question 6

A broker dealer in debt securities may be able to execute a transaction away from the most currently quoted price IF:

Answer 6

• There has been a change in interest rates that will affect the security’s price
• credit quality of the security has changed significantly
• there has been a news announcement which would affect the price of the securities

Question 7

SelectNet

Answer 7

• automated nasdaq market service that enables securities firms to route orders, negotiate terms, and execute trades in nadaq securities- this eliminates the need for verbal contact between trading desks.

Question 8

Alternative Trading Systems (ATS) or Electronic Communications Networks (ECNs)

Answer 8

• non exchange, electronic execution systems that widely disseminate orders entered by market makers to third parties. ATS or ECNs are not run by FINRA.

Question 9

ATS/ECN requirements (4)

Answer 9

• must report trades within 10 seconds of execution
• required to report volume weekly
• required to report the number of securities transactions executed within its system
• required to use a single market participant identifier (MPID) when reporting to FINRA.

Question 10

Block size trades

Answer 10

• 10,000 or more shares or 200k or more in dollar value.
• these trades occurring on ATS will be aggregated across all NMS stocks and will be published monthly and made available on FINRAs website

Question 11

The Portfolio System for Institutional Trading (POSIT)

Answer 11

• electronic trading system that attempts to match buy and sell orders for common stock (cross) anonymously between institutions with large orders. institutions enter orders which are matched approx 15 times a day.

Question 12

CQS

Answer 12

• electronic service that provides quotes on issues listed on the NY and American stock exchanges, regional stock exchanges, and issues traded by FINRA members in the 3rd market

Question 13

CQS Facts (6)

Answer 13

• NASDAQ MMs are allowed to trade exchange listed securities as principal when registered as a CQS MM
• CQS MMs are allowed to trade listed securities before the primary exchange opens. MMs must be open from 930 am to 4pm.
• CQS MMs must enter a quote within 5 business days or lose registration
• CQS MMs must maintain continuous firm 2 sided quotes and execute incoming orders up to their displayed size. they may not lock or cross markets
• after voluntary withdrawal, a CQS MM must wait 1 business day before registering (nasdaq=20)
• a CQS MM would not display quotes in non-nasdaq stocks.

Question 14

CAES- Computer Assisted Execution System

Answer 14

• allows FINRA member firms that are MMs in exchange-listed securities to direct buy and sell orders to each other. Also allows members firms who are not mms to direct agency orders to 3rd market MMs for automatic execution.

Question 15

ITS

Answer 15

• Intermarket trading system links together nasdaq, national, and regional stock exchanges. Interconnects competing exchange markets for the purpose of choosing the best market. securities in ITS do this through CAES.

Question 16

Reporting for last sale reports of transactions in designated securities executed between 4 and 8pm:

Answer 16

-shall be reported as soon as practicable, but no later than 10 seconds after execution, and be designed to denote the execution was outside normal mkt hours

Question 17

Reporting for last sale reports of transactions in designated securities executed between midnight and 8am:

Answer 17

• shall be reported by 815 AM EST on trade date and be designed to denote their execution outside normal mkt hours

Question 18

Reporting for last sale reports of transactions in designated securities executed between 8pm and midnight or on any non business day:

Answer 18

• shall be reported the following business day by 815 am, be designated ‘as/of’ trades to denote their execution on a prior day.

Question 19

OATS (The Order Audit Trail System)

Answer 19

• integrated audit trail of order, quote, and trade info for nasdaq and OTC equity securities.
• member firms required to develop a means for electronically capturing and reporting to OATs

Question 20

Certain info required in data submission to OATs:

Answer 20

• time of receipt of the order
• security symbol
• limit or stop price
• type of account - retail, employee, proprietary
• name of the customer or acct designation is NOT REQUIRED
• stop order transactions report twice: the time the parties agree to the stop stock price, and the actual time of execution

Question 21

Securities subject to OATs reporting:

Answer 21

• NASDAQ / NMS
• NASDAQ Small Cap
• OTCBB
• Pink Sheets
• Preferred stocks
• convertible bonds listed and traded on NASDAQ
• Securities listed on foreign securities exchange or executed OTC in a foreign country are NOT reported to OATS
• DPPs, mutual funds, and proprietary orders originating from the normal course of market making are not reportable

Question 22

If a member firm modifies the terms of an order within OATS, a record of what must be kept as if the order was being originated or received at the time of the modification?

Answer 22

• order identifier assigned prior to modification
• the date and time of modification
• date the order was first received
• original price of the order would NOT be reported.
• each report must be submitted to finra DAILY

Question 23

The consolidated tape - what’s displayed/reported?

Answer 23

• displays trades executed on the NYSE floor and trades executed on regional exchanges.

Question 24

What is NOT displayed on the consolidated tape?

Answer 24

• IPOs, primary offerings, private placements, or transactions effected through a tender offer.
• exercise of rights or warrants
• odd lot transactions

Question 25

Large orders and institutional account exceptions:

Answer 25

• orders of 10k shares or more and 100k or more in value, a member is permitted to trade along with a customer, or place a trade on the same side of the market for own account at a price that would satisfy the customer order, provided the member has provided clear and comprehensive written disclosures at account opening and annually thereafter

Question 26

The 3rd market

Answer 26

• trading of listed stocks in the OTC market by market makers. normally reported to the tape. all listed securities are eligible for 3rd market trading

Question 27

the 4th market

Answer 27

• where institutions trade privately with other institutions without use of a broker dealer.