Chapter 12 study notes

Question 1

Transactions in

OTC equity securities are reported

Answer 1

to the OTC Reporting Facility (ORF).

Question 2

Transactions of Nasdaqlisted

and other exchange-listed securities (NYSE or AMEX) that occur over-the-counter are reported to

Answer 2

the FINRA/Nasdaq Trade Reporting Facility (TRF).

Question 3

Nasdaq ACT Technology Platform.

Answer 3

Both the OTC Reporting Facility and the Trade

Reporting Facility make use of the Nasdaq ACT Technology Platform.

Question 4

Both the TRF and the ORF are

open from

Answer 4

8:00 a.m. to 8:00 p.m

Question 5

Transactions of securities quoted on the ADF and executed through private connectivity providers
are reported to

Answer 5

FINRA’s Trade Reporting and Comparison Service (TRACS).

Question 6

TRACS is open from

Answer 6

8:00 a.m. to 6:30 p.m.

Question 7

Nasdaq’s Automated Confirmation Transaction Technology Platform

Answer 7

is a system that facilitates the
reporting and clearing of Nasdaq and OTC transactions by allowing order-entry and market-making
firms to enter priced trades.
This information is then used to report, match, and clear transactions.

Question 8

Trade reporting

Market -Maker Obligations

Answer 8

 Report to the TRF over-the-counter transactions in Nasdaq Global Market securities, Nasdaq
Capital Market securities, and CQS issues, within 10 seconds (during applicable hours), and
enter trade details for all clearable and internalized transactions using the market-maker
function on Nasdaq Workstation
 Correct, decline, or cancel trades, when necessary

Question 9

Trade Reporting

Order-Entry Firm Obligations

Answer 9

Industry rules require that the order-entry (or non-reporting
principal) side must take one of the following actions for each transaction:
 Enter a version of the trade within 20 minutes of execution using the OE Browse Function
 Accept the market-maker trade entry on the TRF within 20 minutes of the execution
 Decline an incorrect market-maker trade entry on the TRF to cancel the trade entry, when
necessary

Question 10

Reporting ECNs

Answer 10

A Reporting ECN is a participant of a registered clearing agency (for clearing or
comparison purposes), or has a clearing arrangement with a clearing firm. These ECNs submit trade
reports to the Trade Reporting Facility and identify themselves as the reporting party. They may also
submit reports on behalf of another reporting party (i.e., another FINRA member), provided the
reporting party is identified in the report. Reporting ECNs include both electronic communication
networks and alternative trading systems.

Question 11

Reporting

Cancelled Trades

Answer 11

Trades executed during normal business hours and cancelled at or before 4:00 p.m. on the date of
execution should be reported within 10 seconds. If the trade was executed during normal business
hours and cancelled after 4:00 p.m., but before 8:00 p.m., the firm should use its best effort to report
the cancellation by 8:00 p.m. If the trade was executed during normal business hours and cancelled
after 8:00 p.m., the firm must report the transaction no later than 8:00 p.m. the next business day.

Question 12

Trade Reporting and Processing Methods

Answer 12

 Trade by Trade Match—Both reporting parties submit data to the Trade Reporting Facility and
the system performs an online match.
 Trade Acceptance—The reporting party enters its version of the trade into the system and the
contraparty reviews the trade report and accepts or declines the trade. An acceptance results in
a locked-in trade. A declined trade report is purged from the system at the end of trade date
processing.
 Aggregate Volume Match is a batch type comparison run at the end of the trade day for
previously entered trades that remain uncompared. In this process, if the information of the
trades match, the volume will be added together to effect a match.
 T + N—Used for next-day clearing and may be submitted until 5:15 p.m. each business day.

Question 13

Reporting STep Outs

Answer 13

In other
words, to step out of a trade, a member must report the clearing step-out on the same facility as the
original trade report.
An exception to this rule may occur in cases of riskless principal transactions, where one leg is
reported to the FINRA facility (for dissemination to the public), while the other leg is reported as a
clearing-only trade.

Question 14

reporting clearing only trades

Answer 14

Clearing-only trades are not reported to the Tape and are therefore not
disseminated to the public. This is an acceptable condition for riskless principal transactions
provided one leg is reported to the public.

Question 15

Super Caps,

Answer 15

Clearing firms often place limits on the gross

dollar amount of trades on an interday or intraday basis

Question 16

blockbuster trade

Answer 16

a trade of $1,000,000 or more to be executed

through a broker-dealer’s clearing firm)

Question 17

clearing Blockbuster Trades

Answer 17

is held for 15 minutes. If the clearing firm does not respond
by the end of that period, the trade is accepted.

Question 18

A Risk Management Alert

Answer 18

warns a clearing firm that one of its executing brokers is near or above its
clearing threshold. When a broker-dealer attempts to report a trade with an executing broker that is
near its limits, the system will indicate that the trade is “held,” meaning that the clearing broker
must give permission for it to be completed. The clearing broker can use Clearing Broker Scan to
allow or inhibit the trade, as a blockbuster or sizeable transaction.

Question 19

Nasdaq-Listed and otherExchange-Listed Securities

time during market hours

Answer 19

During normal trading hours (9:30 a.m. to 4:00 p.m.), over-the-counter
transactions in Nasdaq-listed securities that are not executed on the Nasdaq Market Center Execution
System must be reported to the TRF through the ACT Technology Platform within 10 seconds of
execution. If the ACT Platform is not available due to service or transmission problems, the trade
must be reported by phone to the TRF Operations Department. Trades

Question 20

Trade Reporting for ADF-Eligible Securities

Answer 20

Midnight – 8:00 a.m. Between 8:00 – 8:15 a.m.; designated as .T; if not reported by 8:15 a.m., it must be
reported using the .U modifier
8:00 – 9:30 a.m. Within 10 seconds; designated as .T; trade reported later than 10 seconds must be
reported using the .U modifier
9:30 a.m. – 4:00 p.m. Within 10 seconds; if late, designated .Z
4:00 – 6:30 p.m. Within 10 seconds; designated as .T; trade reported later than 10 seconds must be
reported using the .U modifier
6:30 p.m. – Midnight
If reported T + 1 between 8:00 a.m. – 8:15 p.m. trade is designated as/of and must
be reported using the .T modifier. If not reported by 8:15 a.m., trade must be
reported using the .U modifier.

Question 21

Transactions Not Required To Be Reported

Answer 21

The following transactions are not required to be
reported to the TRF:
 Transactions reported automatically by another system,
 Transactions that are a part of primary or secondary distribution private placements
 Transactions in which the buyer and seller have agreed to a price substantially unrelated to the
current market for the security (e.g., to make a gift)
 Purchases or sales related to the exercise of an option or convertible at a pre-established price
not related to market value
 Purchases of securities off the floor of an exchange, pursuant to a tender offer

Question 22

Which Firm Reports the Transaction?

Answer 22

To avoid double counting, the transaction is reported to
the TRF or ORF by only one side of the trade.
1. In a transaction between two member firms, the executing party is required to report.
2. In a transaction between a member firm and a non-member firm or customer, only the
member firm reports.

Question 23

The definition of the executing party is

Answer 23

is the member firm that received an order for handling or
execution or is presented an order against its quote and does not reroute the order, and executes
the transaction.If two firms meet this definition, the
selling firm is required to report the transaction. This

Question 24

Transactions Reported to ADF

Answer 24

ADF-eligible securities include Nasdaq Global Market, Nasdaq
Capital Market, Nasdaq Convertible Debt Securities, and other exchange-listed securities trading
over-the-counter (CQS securities).

Question 25

OTC Reporting Facility (ORF)

Reporting Time frames

Answer 25

Midnight – 8:00 a.m. Between 8:00 – 8:15 a.m.; designated as .T; if not reported by 8:15 a.m., it must be
reported using the .U modifier
8:00 – 9:30 a.m. Within 10 seconds; designated as .T; if trade reported later than 10 seconds, it must
be reported using the .U modifier
9:30 a.m. – 4:00 p.m. Within 10 seconds; if late, designated .Z (or .SLD)
4:00 – 8:00 p.m. Within 10 seconds; designated as .T; if trade reported later than 10 seconds, it must
be reported using the .U modifier
8:00 p.m. – Midnight
If reported T + 1 between 8:00 a.m. – 8:15 p.m. trade is designated as/of and must
be reported using the .T modifier. If not reported by 8:15 a.m., trade must be
reported using the .U modifier.

Question 26

Order Audit Trail System (OATS)

Answer 26

The Order Audit Trail System (OATS) is a system that enables FINRA to effectively review market
activity in regard to customer orders within a member firm, to conduct surveillance, and to enforce
rules

Question 27

Information that must be reported to FINRA in an OATS

Answer 27

 From whom the order was received (customer or other member)
 The time the order was received from the customer
 Order identifier
 Date and time of receipt
 How the order was received (manually or electronically)
 Terms of the order
– Buy or sell
– Long or short
– Stock
– Shares
– Price
– Whether the order is an intermarket sweep order
– Order type (market, limit, etc.)
– Time in force
– Special handling requests
– Account type
 Where the order was routed for execution
 How it was routed (manually/electronically)
 Whether the order was modified
– Cancelled
– Changed
– Date
– Time
 Execution
– Price
– Partial execution
– Full execution
– Date– The exchange where the trade was reported
 Whether there is a separate reporting agent for OATS

Question 28

OATS transmissions must be reported either

Answer 28

on the same day that the order was received or the day
that such information first becomes available. OATS reports must be transmitted daily, either in a
single submission or in multiple electronic submissions.
Oats only applies to customer orders

Question 29

clearly erroneous transaction time frames

Answer 29

A member firm that receives an execution that it believes is
clearly erroneous shall submit a written complaint within 30 minutes of the execution time. In the case
of an Outlier Transaction, a request may be made within 60 minutes after the transaction. An Outlier
Transaction is a transaction in the Nasdaq market where the execution price of the security is greater
than three times the current numerical guidelines.

Question 30

Trade Reporting and Compliance Engine (TRACE)

Answer 30

TRACE was created to provide greater transparency in the corporate bond market. It is not a
quotation or an execution system. Broker-dealers provide quotes and will execute transactions in
corporate bonds. There is no regulatory quote or execution system as there is for equity securities.

Question 31

FINRA disseminates transaction information for all TRACE-eligible securities that are publicly
traded, except for those

Answer 31

issued under Section 4(2) (i.e., private placements) of the Securities Act or
Rule 144A, and transacted between QIBs. Although securities issued under Rule 144A are reported
to TRACE, the information is not disseminated.

Question 32

TRACE reports

Timeframe

Answer 32

must be submitted within 15 minutes