CHAPTER 17: ORDERS AND TRADE EXECUTION

Question 1

Equities that are not listed on either a physical or electronic exchange are referred to as

Answer 1

OTC Equities or non-exchange-traded securities.

Question 2

True or False. U.S. government bonds, some corporate bonds, and certain derivates products, are also traded in the OTC market through various dealer-to-dealer networks.

Answer 2

True

Question 3

Also called an order memorandum, is a record of a customer’s instructions regarding the execution of a buy or sell order.

Answer 3

An order ticket

Question 4

This is often executed between the bid and offer with both customers paying the firm a commission.

Answer 4

Agency Cross

Question 5

A brokerage firm that executes a customer order by locating another party willing to take the other side of the transaction.

Is performing a _______.

Answer 5

Agency Cross

Question 6

is a financial institution or individual that actively quotes both a buy and a sell price for a financial instrument (e.g., stocks, bonds, or derivatives) in order to facilitate trading and maintain liquidity in the market.

• profit from the bid-ask spread, which is the difference between the buy and sell prices.

Answer 6

Market Maker

Question 7

A _ firm that executes a customer order by taking the other side of the transaction itself.

Answer 7

Dealer. (Acting as a principal)

The dealer profits by purchasing securities from customers at one price and selling those securities to other customers at a higher price.

Customer wants to sell (dealer is buying) therefore dealer performs a mark down

Customer wants to buy (dealer is selling) therefore is charged a mark up.

Question 8

When a firm buys a security and brings it into its inventory to fill preexisting customer orders, it’s capacity is considered to be a

Answer 8

Riskless principal

Ex: 10 customer market orders to purchase 100 shares of stock that the dealer doesn’t maintain in its inventory, the firm may choose to buy 1,000 shares as principal from another dealer and then resell the securities to its customers at the same price with a markup included.

Question 9

refers to the act of facilitating the buying or selling of goods, services, or financial assets between two or more parties. In other words, a broker acts as an intermediary or middleman between buyers and sellers to help them execute a transaction.

Answer 9

Brokering a trade

Question 10

When a firm buys securities for or sells securities from its own inventory, it’s acting as a _

Answer 10

dealer (principal)

Question 11

A dealer that always stands ready to buy or sell a specific stock is called a _ in that stock and assumes risk by taking the other side of the trade.

Answer 11

market maker

Question 12

if a dealer (market maker) is quoting a stock at $20.00 - $20.25, it’s willing buy stock at $_ per share and sell it for $_ per share to other dealers.

Answer 12

if a dealer (market maker) is quoting a stock at $20.00 - $20.25, it’s willing buy stock at $20 per share and sell it for $20.25 per share to other dealers. The $.25 difference between the bid of $20.00 and the ask of $20.25 is the spread—a source of profit for the market maker.

Question 13

In a _ trade, rather than charging a markup, the dealer profits by charging a different price for the securities

Answer 13

net-basis trade

Any dealers that execute net-basis trades with customers are subject to both disclosure and consent requirements. In a net basis trade, a firm’s profit is not disclosed on the customer’s confirmation; however, in a riskless principal trade, the markup must be disclosed.

Question 14

The _ role includes maintaining liquidity, promoting a fair and orderly market,
and resolving trade imbalances that result from a temporary lack of supply or demand in a particular
security.

Answer 14

Designated Market Maker’s (DMM)

The DMM must buy for and sell from its own account (acting as a dealer) to make the market
fair and orderly. In doing so, the DMM must be a buyer when there are no buyers and be a seller when
there are no sellers. The result of these actions is a narrowing of the spread between transactions.

Question 15

The _ is the only member that’s allowed to continuously buy and sell stock on a principal basis (i.e., make a market). In return for this privilege, the _ must stand ready to buy when there’s an excess in selling interest.

Answer 15

The DMM is the only member that’s allowed to continuously buy and sell stock on a principal basis (i.e., make a market). In return for this privilege, the DMM must stand ready to buy when there’s an excess in selling interest.

Question 16

is a type of order where the trader gives the broker discretion over the price and time of execution. The broker is expected to use their judgment to obtain the best possible price for the trader, considering market conditions and the trader’s objectives.

Answer 16

Not-held Orders

Question 17

is an electronic trading system used by the New York Stock Exchange (NYSE) to facilitate the trading of stocks and other financial instruments

Answer 17

The Super Display Book (SDBK)

Question 18

_ orders can be accepted on the DMM’s book because they have a specified price, and the order will only be executed when the market reaches that price. This allows the DMM to maintain an orderly book with a record of active limit orders waiting for execution.

However, _ orders and _ orders cannot be accepted on the book because they require immediate execution. _ orders must be executed as soon as they are received, and _ orders leave the execution to the broker’s discretion. In both cases, these orders do not have a specific price that can be recorded on the DMM’s book, so they must be handled separately and executed immediately. This ensures that the orders are executed in a timely manner, prioritizing the trader’s objectives of speed or discretion over price.

Answer 18

Open limit orders can be accepted on the DMM’s book because they have a specified price, and the order will only be executed when the market reaches that price. This allows the DMM to maintain an orderly book with a record of active limit orders waiting for execution.

However, market orders and not-held orders cannot be accepted on the book because they require immediate execution. Market orders must be executed as soon as they are received, and not-held orders leave the execution to the broker’s discretion. In both cases, these orders do not have a specific price that can be recorded on the DMM’s book, so they must be handled separately and executed immediately. This ensures that the orders are executed in a timely manner, prioritizing the trader’s objectives of speed or discretion over price.

Question 19

True or Fals. By trading during imbalances, the DMM is maintaining liquidity in the market for that stock

Answer 19

True

Question 20

True or False. Since a DMM may not compete with public orders, it may only
bid for stock higher or offer stock lower than the prevailing market price to reduce the spread.

Answer 20

TRUE

For example,

if a quote is 40.00 bid and 40.10 offered, the DMM may bid 40.01 or higher and offer 40.09 or lower.

Question 21

is a practice that may be carried out by a designated market maker (DMM) on a stock exchange like the New York Stock Exchange (NYSE). It involves the DMM guaranteeing an execution price for a floor broker’s client order, usually in the context of an opening or closing auction. The DMM essentially “stops” or “locks” the stock at a specific price for the order, providing price certainty to the client.

• Members are required to report to their customers that the order was stopped if
  both members agree to the terms.
• If an order is executed at a less favorable price than the agreed upon
  price, the member that agreed to the stop is liable for the difference

Answer 21

“Stopping Stock”

A DMM is able to stop stock if it’s for a public order, but not for its own account or an account for
another member firm.

Question 22

Most debt securities trade in these dealer-to-dealer settings (often referred to as over-the-counter
[OTC] markets), including:

Answer 22

• corporate bonds
• municipal bonds
• U.S. government and government agency securities

Question 23

The person responsible for maintaining the broker-dealer’s inventory and trading the firm’s proprietary account is typically called a

Answer 23

“proprietary trader” or “prop trader.”

Question 24

The stated price at which market makers are willing to buy or sell
securities is considered their _

Answer 24

The stated price at which market makers are willing to buy or sell
securities is considered their firm quote

Question 25

it’s a violation of industry rules to provide a firm quote and then fail to fill an order on the basis of the
quotation. Such action constitutes a firm-quote violation that’s referred to as _

Answer 25

it’s a violation of industry rules to provide a firm quote and then fail to fill an order on the basis of the
quotation. Such action constitutes a firm-quote violation that’s referred to as backing away

However, this provision doesn’t preclude a dealer from changing its
quotation during the course of the trading session as market conditions dictate.

Question 26

If a firm provides a _ quote, it’s indicating that the quote is subject to confirmation and is therefore not
firm. For example, if a dealer acts as a correspondent for another dealer that’s a market maker and is asked
for a quotation, the dealer may respond 30.00 to 30.50 – subject. In this case, the dealer is indicating that
the actual price must be confirmed with the market maker before the order is able to be transacted.

Answer 26

Subject Quote

Remember, unless a specific qualification is given, all quotes are considered firm.

Question 27

a firm may provide a _ quote when it receives an inquiry regarding the
availability of a block of stock. At the same time, the dealer may have a client who previously
indicated an interest in buying or selling the same stock at a specified price. The dealer may respond
40.00 to 40.75 – workout. This is done to indicate that, before a firm quote can be given, the client
must be contacted to determine if he’s still interested in buying or selling the stock.

Answer 27

Workout Quote

Remember, unless a specific qualification is given, all quotes are considered firm.

Question 28

At times, a dealer may wish to sell securities, but will ask the buyer to suggest a purchase price.
This is referred to as a bid wanted (BW). When a dealer asks a seller to make an offer, it’s
referred to as an offer wanted (OW).

Answer 28

Note

Question 29

To be a market maker in the Nasdaq system, a dealer must provide regular _ and _ for a security,
meet specific capital requirements, and be registered with _. A registered market maker that enters a
bid and offer in the Nasdaq system must be prepared to buy or sell a minimum unit of trading (100
shares) at its quoted bid and offer

Answer 29

To be a market maker in the Nasdaq system, a dealer must provide regular bids and offers for a security,
meet specific capital requirements, and be registered with FINRA. A registered market maker that enters a
bid and offer in the Nasdaq system must be prepared to buy or sell a minimum unit of trading (100
shares) at its quoted bid and offer

Question 30

Transactions in Nasdaq securities must be reported within 10 _
of execution.

Answer 30

Transactions in Nasdaq securities must be reported within 10 seconds
of execution.

Question 31

The following information
relates to the three levels in the Nasdaq system:

Level _ access provides subscribers with the highest bid and the lowest offer (i.e., the inside
market) for a security that has at least two market makers. However, actual market makers are
not listed. Level _ is typically used by the branch offices of member firms

Answer 31

Level I

Question 32

The following information
relates to the three levels in the Nasdaq system:

Level _ access is exclusive to a market maker in the Nasdaq system and allows it to enter and
update bids and offers for the securities for which the firm is authorized to enter quotes. Once
entered in Level _, these quotations appear on the system immediately.

Answer 32

Level III

Question 33

The following information
relates to the three levels in the Nasdaq system:

Level _ access provides bids, offers, and quotation sizes for all of the market makers that enter
quotes for each security

Answer 33

Level II

Question 34

From the standpoint of a customer who is selling stock, the highest bid is the best (i.e.,
the price at which a market maker will buy); however, for a customer who is buying stock, the lowest offer is
the most desirable (i.e., the price at which a market maker will sell). These two prices are referred to as the

Answer 34

inside market or the National Best Bid and Offer (NBBO)

Nasdaq securities are quoted by multiple
market makers. For example, MNOP stock has three market makers that have entered the following quotes:

Market Maker #1 20.25 - 20.85
Market Maker #2 20.10 - 20.75
Market Maker #3 20.50 - 21.00

Notice that the inside market is not necessarily the actual quote of any single dealer, but rather, a
composite quote of the best prices currently available.

Question 35

What time does the premarket trading session begin?

Answer 35

e from 4:00 a.m. to 9:30 a.m. ET

Question 36

A Nasdaq market maker must be open for business between the hours of

Answer 36

9:30 a.m. - 4:30 p.m. ET

Question 37

the aftermarket trading session takes place

Answer 37

From 4:00 p.m. - 8:00 p.m. ET

Market makers may or may not wish to participate in the premarket or aftermarket trading sessions. However, any
market makers that participate in the aftermarket session must keep their quotes open until at least 6:30
p.m. and may continue to quote until 8:00 p.m.

Question 38

is generally defined as any equity that’s not listed or traded on a national securities
exchange (e.g., NYSE or Nasdaq). O

Answer 38

An OTC equity security

include domestic and foreign equity issues, warrants, units,
American depositary receipts (ADRs) and direct participation programs (DPPs). Prices of OTC equities
may be obtained from the OTC Markets Group.

Question 39

In an effort to create clarity in the investment process, the OTC Markets Group organizes its securities into three
tiered marketplaces:

Answer 39

OTCQX, OTCQB and OTC Pink.

The differences in the tiers are based on the
quality and quantity of the information that the companies make available

Question 40

is for established investor-focused U.S. and global companies that
are distinguished by the integrity of their operations and diligence with which they convey their
qualifications. To qualify, the companies must meet high financial standards, demonstrate
compliance with U.S. securities laws, and be current in their disclosures.

Answer 40

The OTCQX Best Marketplace

Question 41

is for entrepreneurial and development stage U.S. and
international companies that are unable to qualify for OTCQX. To be eligible, the companies
must be current in their reporting and undergo an annual verification and management
certification process

Answer 41

The OTCQB Venture Marketplace

Question 42

offers trading in a wide spectrum of equity securities through any
broker-dealer. This marketplace is for all types of companies and their equities are included in this
tier by reasons of default, distress, or design.

Answer 42

The OTC Pink Marketplace

Question 43

these issues may often be characterized by their
infrequent trading and/or the limited number of outstanding shares.

Answer 43

OTC Markets Group issues

Although many quotes are considered firm, the system may provide indications of bid and ask prices
that are subject to verification. Also, any bids wanted and offers wanted that have been entered by
broker-dealers are not considered firm.

Question 44

The third market refers to

• brings together investors that are willing and able to purchase and sell their own securities holdings
  for cash and immediate delivery
• The prices of securities are often lower due to the absence of commissions

Answer 44

exchange-listed securities being traded over-the-counter
between broker-dealers and large institutional investors.

Question 45

The fourth market refers to

Answer 45

direct institution-to-institution trading and doesn’t
involve the services of a broker-dealer.

While some of this trading includes different portfolio managers contacting one another by phone, most true fourth-market trades are internal crosses set up by money managers that handle several institutional accounts. The proprietary trading systems (PTSs)
that are set up to facilitate the institution-to-institution trading are sometimes considered to be part of
the fourth market. However, the SEC doesn’t consider them part of this market since PTSs are either
registered as broker-dealers or operated by broker-dealers.

Question 46

Charge subscribers a fee for using their system and act in only an agency, not principal, capacity

Answer 46

Electronic Communication Networks (ECNs)

Question 47

Stocks that are non-exchange-listed and not actively quoted in the over-the- counter markets are bought and sold in what investors refer to as the

Answer 47

Grey (Gray) Markets

Grey market stocks are often associated with companies that were previously exchange-traded, but have recently been delisted. Other grey market stocks include those associated with companies that are soon to go public. Grey markets are unofficial (e.g., like black markets), but not strictly illegal. Investors should be aware of the lack of liquidity in grey market stocks.

Question 48

are often associated with companies that were previously exchange-traded, but have recently been delisted.

Answer 48

Grey market stocks

Question 49

The Consolidated
Quotation System (CQS)

Answer 49

the electronic service that provides quotations for listed securities that are
traded in markets outside of the primary marketplace where the securities are listed.

Question 50

is the electronic service that provides quotations for listed securities that are
traded in markets outside of the primary marketplace where the securities are listed.

Answer 50

The Consolidated
Quotation System (CQS)

For example, an NYSE- or AMEX-listed security that also trades in the OTC market (previously noted as a thirdmarket trade) is quoted on CQS. Please note, OTC Bulletin Board (OTCBB) and OTC Markets Group
equities (OTC equities) are not quoted on the CQS.

Question 51

What are directed orders?

Answer 51

Directed orders are customer orders that specify the exchange on which they want their trade executed. Broker-dealers are not obligated to accept these orders, but if they do, they must follow the customer’s instructions.

Question 52

What are non-directed orders?

Answer 52

Non-directed orders are customer orders that do not specify an exchange for execution. These orders are subject to the best execution rule, meaning broker-dealers must seek the most favorable terms for their customers, considering factors like price, speed, and likelihood of execution.

Question 53

Non-directed orders are customer orders that do not specify an exchange for execution. These orders are subject to the best execution rule, meaning broker-dealers must seek the most favorable terms for their customers, considering factors like price, speed, and likelihood of execution.

Answer 53

a broker-dealer’s best execution obligation

Question 54

Are directed orders subject to the best execution rule?

Answer 54

No, directed orders are exempt from a broker-dealer’s best execution obligation. Since the customer specifies the exchange for execution, the broker-dealer is not required to seek the most favorable terms in this situation.

Question 55

What is an Alternative Trading System (ATS)?

Answer 55

An ATS is an SEC-approved, non-exchange trading system that provides an alternative method to trading on an exchange and enhances the liquidity of securities in the marketplace. Examples include broker-dealer internal execution systems, certain ECNs, and trade crossing networks.

Question 56

What are the registration requirements for an Alternative Trading System (ATS)?

Answer 56

An ATS is generally required to register with the SEC and FINRA as a broker-dealer but is not required to be registered as an exchange

Question 57

Does an ATS set rules or discipline its subscribers?

Answer 57

No, an ATS does not set rules or discipline its subscribers. However, due to its registration as a broker-dealer, it is subject to FINRA rules and disciplinary action.

Question 58

What is the primary purpose of Alternative Trading Systems (ATSs)?

Answer 58

The primary purpose of ATSs is to provide an alternative method to trading on an exchange and to enhance the liquidity of securities in the marketplace.

Question 59

Processing a Transaction
Every transaction that’s executed by a broker-dealer must adhere to the following flow of processing:

1. Order Department (Wire Room)—This department transmits buy and sell orders by allocating them to a specific exchange or product area.
2. Purchase and Sales Department—After an order is completed, the P&S department records the transaction and compares the trade details with the broker-dealer on the other side of the trade (the contrabroker) for the purpose of reconciling possible trade discrepancies.
3. Margin Department―This department enforces customer account rules with regard to payment and delivery and maintains an account record for each customer and posts all trade activity.
4. Cashiering Department―This is where funds and securities are received and disbursed. 5. Reorganization Department—This department handles all post-settlement issues, such as cash and stock dividend payments, stock splits, and tenders.

Answer 59

Note

Question 60

Under the SEC’s short selling rules (i.e. Regulation SHO), a broker-dealer is required to mark all sell order tickets either

Answer 60

long or short.

This requirement applies to all sales of
equity securities that are traded on an exchange (e.g., NYSE or Nasdaq) or OTC.

Question 61

A sell order is marked long if the seller:

Answer 61

 Owns the security being sold and it’s either in the possession or control of the broker-dealer, or
 Owns the security and it’s reasonably expected that the security will be delivered by no later than
the settlement date
 Has exercised a call option or warrant, or has converted a convertible preferred stock or bond

Question 62

A sell order is marked short if the seller:

Answer 62

 Doesn’t own the security being sold (i.e., she’s effecting a sale by delivering borrowed shares)
 Owns the security being sold, but doesn’t reasonably expect that it will be in the possession or
control of the broker-dealer prior to the settlement date

Question 63

The purpose of this requirement is to protect against uncovered (i.e., naked) short selling abuses.

Answer 63

Regulation SHO and the Locate Requirement

Prior to executing a short sale, a broker-dealer must locate the securities to ensure that they will be
available for delivery by the settlement date.

Question 64

A broker-dealer may not accept an order to sell short an equity security for any person unless one of
the following locate conditions is met:

Answer 64

1. The broker-dealer has borrowed the security or entered into an arrangement to borrow the
   security.
2. The broker-dealer reasonably believes that it’s able to borrow the security for delivery on the
   date that delivery is due.

Question 65

is a list of securities that are readily available for borrowing. The SEC accepts the use of these lists, which must be less than 24 hours old, as reasonable grounds for the belief that the securities included will be available for borrowing.

Answer 65

An Easy to Borrow list

Question 66

What is the purpose of the Easy to Borrow list?

Answer 66

The purpose of the Easy to Borrow list is to aid in the process of locating securities for short sales, help avoid fails to deliver, and expedite the fulfillment of the locate provision.

Question 67

What is a Hard to Borrow list?

Answer 67

A Hard to Borrow list is a list of securities that are not readily available for borrowing. These securities are not included on the Easy to Borrow list and are typically only available to broker-dealer employees.

Question 68

Why do broker-dealers create Easy to Borrow and Hard to Borrow lists?

Answer 68

Broker-dealers create these lists to facilitate the process of locating securities for short sales, ensure compliance with SEC regulations, and maintain an organized inventory of securities available for borrowing.

Question 69

Who typically has access to the Hard to Borrow list?

Answer 69

The Hard to Borrow list is typically only available to broker-dealer employees, while most customers have access to the Easy to Borrow list.

Question 70

is characterized by very heavy trading, fast-moving prices, high volatility, and an imbalance in the number of shares that investors are willing to buy or sell. It may result from either positive or negative events and can cause delayed updating of quotes due to rapidly changing prices and trades.

Answer 70

A fast market

Question 71

What are some possible causes of a fast market?

Answer 71

A fast market may be caused by an IPO attracting greater interest than expected, a publicly traded company releasing unexpectedly pessimistic earnings forecasts, or other significant market events that drive high trading volume and price volatility.

Question 72

In a fast market, what type of order might be a better choice for a customer?

Answer 72

In a fast market, a limit order may be a better choice for a customer, as it sets a specific price at which the customer is willing to buy or sell, providing more control over the execution price and reducing the risk of unfavorable price fluctuations.

Question 73

A buy limit order may only be executed at the limit price or _ . A sell limit order may only be executed at the limit price or _.

Answer 73

A buy limit order may only be executed at the limit price or Lower. A sell limit order may only be executed at the limit price or
Higher

Question 74

How are buy limit orders prioritized?

Answer 74

Buy limit orders are given priority from high price to low, meaning the buyer willing to pay the highest price moves to the front of the buy limit line.

Question 75

How are sell limit orders prioritized?

Answer 75

Sell limit orders are given priority from low price to high, meaning the seller willing to receive the lowest price moves to the front of the sell limit line.

Question 76

If three sell limit orders are entered for XYZ stock at $70.11, $70.23, and $70.07, which order moves to the front of the sell limit line?

Answer 76

The sell limit order at $70.07, as it is the lowest price.

Question 77

Using the ABC stock example, arrange the buy limit orders from the highest priority to the lowest priority: $30.03, $30.11, and $30.07.

Answer 77

$30.11, $30.07, $30.03

Question 78

If two or more customers enter a limit order at the same price, the order that was entered first receives priority.

To summarize:
1. Market orders have first priority.
2. Limit orders are ranked by price.
3. Limit orders that are placed at the same price are ranked by time of entry.

Answer 78

Note

Question 79

What is the main purpose of stop orders?

Answer 79

Stop orders are often used by customers to prevent a large loss or protect a profit on an existing stock position.

Question 80

When does a stop order become a market order?

Answer 80

A stop order becomes a market order to buy or sell securities if the order’s specified price (stop price) is reached or passed.

Question 81

In a buy stop order, when does the order get activated?

Answer 81

The order gets activated when the stock trades at the stop price or above.

Question 82

An investor shorts 100 shares of a stock at $40 and places a buy stop order at $45. What happens when the stock price reaches $45 or above?

Answer 82

The buy stop order is activated, and the investor buys 100 shares at the market price to close out (buy back) the short position.

Question 83

Why do investors use buy stop orders?

Answer 83

Investors use buy stop orders to protect their position against a rise in the price of a security when they have a short sale.

Question 84

A _ order functions like a stop order by getting activated when the market reaches or surpasses the set stop price. However, after activation, it turns into a limit order and can only be executed at a specific price or a better one. As it combines both stop and limit orders, there’s a possibility that the customer may not get the execution they wanted.

Answer 84

A stop-limit order functions like a stop order by getting activated when the market reaches or surpasses the set stop price. However, after activation, it turns into a limit order and can only be executed at a specific price or a better one. As it combines both stop and limit orders, there’s a possibility that the customer may not get the execution they wanted.

Question 85

For example, an investor purchases 1,000 shares of DEF at $15 and, fearing a
decline in its price, places a sell stop-limit order at $10. After the order is
entered, market transactions occur as follows:

$10.70…$10.45…$10.05…$10.00…$9.97…$9.97…$10.00

What are the Trigger and Execution prices?

Answer 85

The order is activated by the first trade at $10.00 and becomes a limit order to sell
1,000 shares at $10.00 or higher. After being triggered, notice that the stock
subsequently fell below the stop price. The order was only able to be executed because
the stock increased back to $10.00. Remember, once activated, the risk is that, unless
the order can be filled at the limit price or higher, the order will not be filled.

Triggered when falls to $10 but not executed until it goes back to $10

Question 86

For example, an investor sells short 1,000 shares of GHI at $20 and, fearing a
rise in its price, places a buy stop-limit order at $24. After the order is entered,
market transactions occur as follows:

$23.55…$23.80…$23.95…$24.02…$24.03…$24.02…$24.00

What is the Trigger price? What is the Execution price?

Answer 86

The order is activated by the trade at $24.02 (notice that the market traded
through the stop price of $24.00) and becomes a limit order to buy 1,000 shares
at $24.00 or lower. After being triggered, notice that the stock subsequently rose
above the stop price. The order was only able to be executed because the stock
decreased back to $24.00. Remember, once activated, the risk is that, unless the
order can be filled at the limit price or lower, the order will not receive execution.

Trigger price = $24.02, Execution price = $24.00

Question 87

True or False. If a day order is not executed, the order is automatically cancelled at the end of the day

Answer 87

True

Question 88

True or False. At-the-Open Order. This is an order to buy or sell at the opening price. If the order is not executed
at the opening, it will be cancelled.

Answer 88

True

Question 89

True or False. A not-held order is limited to the day on which the order is entered and, therefore, must be
filled at some point before the end of the day or reentered by the client for the next day.

Answer 89

True

Question 90

occurs with an execution of a buy order at a price that’s above the lowest ask price, or the execution of
a sell order at a price that’s below the highest bid.

Answer 90

A trade-through

Question 91

This rule prohibits the trading-through of a protected quote.

Answer 91

Order Protection Rule

A trade-through occurs with an execution of a buy order at a price that’s above the lowest ask price, or the execution of
a sell order at a price that’s below the highest bid.

For example, the same security is quoted on both the NYSE and Nasdaq. If the NYSE has an
ask price of $34.20 and Nasdaq has an ask price of $34.15, it’s a violation to execute an
electronic buy order at $34.20 on the NYSE since there’s a better price available on Nasdaq

Question 92

is generally defined as the insertion of a third party between the
customer and the best market. The practice is specifically prohibited when it’s to the detriment of the
customer. However, the prohibition doesn’t apply if the member firm is able to demonstrate that the
customer received a better price because of the intervention of a third party

Answer 92

Interpositioning

Question 93

Without this prohibition, a firm may be tempted to build up a position in a stock right before the
publication of a favorable report or to sell short an issue just prior to an unfavorable release.

Answer 93

Trading Ahead of Research

FINRA’s rule prohibits a member from establishing, increasing,
decreasing, or liquidating an inventory position in a particular security, or derivative of that security, based
on material, non-public, advance knowledge of the content and timing of a research report in that security

Question 94

True or False. FINRA emphasizes that 5% is merely a guideline, it’s possible that certain circumstances will justify higher markups; while conversely, there are other times when even 5% is too much.

Answer 94

True

The 5% Markup Policy.

Exemptions Securities that require the delivery of a prospectus or offering circular are exempt
from the provisions of the 5% policy because these issues are sold at a specific public offering price.
Examples of the securities that are exempt include initial public offerings, municipal securities, and
mutual fund shares.

Question 95

Due to the U.S. equities markets experiencing potentially great market volatility, circuit breakers have been
created to halt or suspend trading under certain circumstances (e.g., due to natural disaster or terrorist attack).

Originally, the reference index for the circuit breakers was the DJIA; however, it’s now the S&P 500.
The SEC-created levels apply to all National Market System (NMS) securities, regardless of the
exchange on which they’re traded. For example, if a market-wide trading halt is in effect, all NMS
stocks listed on the NYSE and those listed on the other exchanges are required to halt trading. For any
NMS stocks that trade in the OTC market, it’s FINRA’s responsibility to halt their trading.

Answer 95

Trigger Value Time (all times ET) Action
Level 1: 7% decline 9:30 a.m. – 3:25 p.m. 15-minute trading halt
Level 2: 13% decline 9:30 a.m. – 3:25 p.m. 15-minute trading halt
Level 3: 20% decline Any time Trading halts for remainder of the day

Question 96

refers to a practice in which a third party, typically another broker-dealer, is inserted between the customer and the best available market price in a securities transaction. This is generally seen as an unnecessary step and can result in the customer receiving a less favorable price than they otherwise might have obtained. It often leads to increased transaction costs and may also result in slower execution of the trade.

Answer 96

Interpositioning

Question 97

• This is FINRA’s policy; it’s NOT a rule
• Instead, it’s a guideline for commissions, markups, and markdowns
  - Certain transactions may justify a higher markup/markdown
  - Others transactions may justify a lower
  markup/markdown

Answer 97

The 5% Policy

Question 98

• Type of security involved (equity or debt) Availability of the security
• Price
• Amount of money involved
• Pattern of markups
• However, the type of client or whether the firm will profit is NOT relevant

Answer 98

Factors That Influence the Charge

Fair Prices and Commissions

Question 99

Fair Prices and Commissions

Answer 99

Application
▪ The policy also applies to proceeds transactions
Involves a client directing a B/D to liquidate securities and use the proceeds to buy other securities
* Markup is calculated based on one trade (as if done for cash

Exclusions
* Trades involving securities sold by prospectus or offering circular (e.g., new issues, mutual funds, variable annuities) Exempt securities (e.g., U.S. government and municipal securities)

Question 100

An order that may be activated but not executd is referred to as a

Answer 100

Stop limit order

Question 101

If a customer’s limit order improves the market maker’s quote it must be displayed within

Answer 101

30 seconds

Question 102

The _ is a FINRA guideline that dictates fair markups and markdowns

Answer 102

5% Policy

Question 103

A _ % decline in the S&P 500 from the previous day’s close results in a market halt for the remaindr of the day

Answer 103

20% decline

if 7% or 13% 15 min halt each time