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Series 24 > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Types of orders

A

Day order (default) vs. good til cancelled (GTC)
Stop order => at threshold, order becomes market order
Buy stop order: equivalent of sell stop order if you’re shorting a stock
Stop limit order: instead of stop order becoming a market order after election, it becomes a limit order.
VWAP: volume weighted average price
All or none: not displayed in market
Immediate or cancel: whatever is not filled is cancelled
Fill or kill
Not held: carte blanche to broker
Market on close/ on open: if not executed => cancelled. Partial exec is possible.

A FOK order combines an all-or-none (AON) specification indicating it must be filled entirely with an immediate-or-cancel (IOC) timeframe.

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2
Q

Priority

A

Priority (time) / Precedence (size) / Parity (split)

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3
Q

What can Designated Market Maker do and not do? (purchase price & types of orders not accepted)

A

can purchase above bid and sell below ask
can’t accept market orders, NH, IOC, FOK, immediately executable limit orders

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4
Q

What is the Inside market?

A

highest bid & lowest offer (excludes stop & AON orders)

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5
Q

What is a Do not reduce (DNR) order?

A

Buy limit & Sell stop GTC orders are by default reduced by the dividend amount. A DNR order is not.

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6
Q

What is the Super Display Book?

A

NYSE
electronic order routing and execution system that sends orders straight to DMM for execution, bypassing floor broker (who is used for more institutional orders)

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7
Q

Rule 203: when can’t a BD accept client’s short sale order?

A

if security isn’t borrowed or easy to borrow.

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8
Q

Sell order marked long: delivery restrictions? exemptions?

A

BD must deliver by settlement date and can’t borrow the securities to deliver, except if another customer failed to deliver or if the securitiy is being loaned to another BD.

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9
Q

Rule 204: how long does BD have to close out failures to deliver or client failures to deliver?

A

BD must close out failures to deliver by T+3
BD must close out customer failures to deliver after 35 days

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10
Q

What is a Threshold security?

A

A threshold list, also known as a Regulation SHO Threshold Security List, is a list of securities whose transactions failed to clear for five consecutive settlement days at a registered clearing agency.

-registered
-aggregate fail to deliver position of 10k shares for 5 consecutive settlement days and position > 0.5% of issuer’s securities
-included on the threshold security list by SRO

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11
Q

What happens if a BD has a fail to deliver in a threshold security?

A

If a BD has a fail to deliver in a threshold security for 13 consecutive settlement days, it must close out the position by buying securities of a like kind and quantity on the 14th day.

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12
Q

How often should a BD file short interest report?

A

2x / month

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13
Q

What is a block trade and what can’t block positioners do?

A

$500k or more

Block positioners can’t trade on a plus tick during last 20mn of trading day (except if info barriers between desks => separate trading dpt can trade)

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14
Q

What is trading along?

A

Rule 92 => BD can’t copy trades of customer (if prior knowledge of order) (except if written permission of institutional customer)

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15
Q

What is front running?

A

Front running: if BD copies trade before executing & reporting the customer’s block trade

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16
Q

When are circuit breakers put in place?

A

can’t short stock if price decline >10% vs. previous day close
CB if S&P falls 7, 13 or 20% in a day (level 1, 2, 3 resp)

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17
Q

Limit Up Limit Down rule

A

Upper & lower bands based on preceding 5mn
If price moves outside bands and if stock doesn’t trade at or inside limit price within 15sec, trading is paused for 5mn

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18
Q

Who acts as a market maker in OTC markets?

A

OTC => no DMMs => BDs act as MMs

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19
Q

MM on NASDAQ: obligations?

A

once approved to quote a security by FINRA, must provide a quote within 5 days

must display quotes under its MPID from 9.30 to 4

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20
Q

MM on OTC: requirements? exemptions?

A

-must have 10K, 10Q & 8K of issuer + offering circular 40d + prospectus 90d
-Form 211 filed by MM at least 3 biz days before entering a quote

Exemption if:
- unsolicited customer order
- piggybacking another dealer’s quote
- current info designation by qualified interdealer quotation system

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21
Q

What is Piggybacking a quote? What is timeframe?

A

OTC security quoted > 1 day => BD can enter same quote

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22
Q

What are Locked & crossed markets? What are implications for MM?

A

Locked: bid = ask price
Crossed: new bid (ask) is higher (lower) than the ask (bid)
MMs can’t enter quotes that lock or cross

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23
Q

What is the NASDAQ market center execution system?

A

order acceptance system to input market orders routed to inside market dealers for automatic execution
NMCES => Inside Market Dealers

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24
Q

How are NMCES orders executed? (priority)

A

execution of orders at quoted price for all MMs at that price, then execution of their reserves

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25
Q

How can MM enter new quotes on NMCES?

A

MM can enter new quotes:
-manually
-automatically (Automatic Quote Refresh - one price level up from worst quote)
-summary basis (several quotes in system)

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26
Q

What is order shredding?

A

BD can’t split order that could be entered in NMCES to increase fees

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27
Q

What are Electronic Communication Networks?

A

-display and execute third party orders
- classified as ATS
-bypass MMs, OTC
-included in NASDAQ quote system but not required to maintain two sided market like an MM
-don’t take a position
-order entry (only display quotes and enter/accept orders) or full participation (can also accept automatic executions)

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28
Q

What are market centers?

A

-OTC MM
-ATS
-MM that internalizes orders
-exchange
-national securities assoc.

29
Q

What are non-directed customer orders? What are implications for BDs? Exemptions?

A

BD must file quarterly report on execution of non-directed customer orders, i.e. orders where the customer didn’t specify the MC it wants

Exemptions:
No need to file for MCs < 5% of NCOs.
BD that rout < 500 orders / mo.

Elements of filing:
MC info
BD relationships with MC
PFOF
Profit sharing
internalization of orders

Customers notified annually

30
Q

What is Regulation NMS?

A

Trades can’t get executed < Protected price of other MCs

Protected price: displayed in a MC and immediately & automatically accessible

31
Q

What is direct market access and what are the controls required?

A

Direct Market Access
-access to trade on an exchange or ATS through BD’s infra (opposite, when customer uses its own infra: “Sponsored Access Program”)

Controls required:
-limit financial exposure of BD
-prevent entry of unreasonably large or erroneous orders

32
Q

Rank the following by strength of listing requirements: OTCQB Venture, OTCQX Best, OTC PINK. What are they registered as?

A

OTCQX Best > OTCQB Venture > OTC PINK
These are not exchanges, but ATSs.

33
Q

What is the third market? How are trades reported? How are quotes entered?

A

Third market: trade of exchange listed securities executed between BDs without going through the exchange
-reported through ACT
-MMs must enter quotes through Consolidated Quotation System

34
Q

What is the fourth market and how are trades entered?

A

Fourth market: trade between two large institutions without using a BD
-INSTINET computer network
-dark pools (trades on proprietary trading systems executed by large institutions) are not in fourth market

35
Q

What are the NASDAQ standards and what happens if there is a violation of the standards?

A

NASDAQ standards
-audit committee w/ independent directors
-proxies
-annual and quarterly reports
-2 independent directors

If violation: 30 days to correct

36
Q

Entering a quote - NASDAQ: timelines

A

9.25: quotes open
9.28: opening cross => NMCES automatically executes orders. Orders can’t be cancelled.
9.28-9.30: indications of order imbalances sent every second (size, % away from current inside market, indicative price i.e. price at which opening cross would take place if executied at the time the imbalance indication was disseminated)
9.30: trading starts. Orders in queue not paired off are executed and reported to tape. First trade reported is NOOP.
9.30.15: if no trades have been matched, NOOP = last sale trade
3.50: on the close orders can’t be entered/modified/canceled
3.55: limit to correct legitimate errors
3.55-4: Imbalance information disseminated

37
Q

Types of Nasdaq orders

A

Early (<9.28), Late (>9.28), Opening (price) Only, Imbalance Only, Extended hours

Imbalance only (IO) orders are limit orders that provide liquidity during the opening and closing rotation on the Nasdaq stock exchange. These can be categorized as “imbalance only open orders” or “imbalance only closing orders”. IO orders are thus placed to offset an order imbalance in the opening or closing cross.

38
Q

How many crosses are there on the NASDAQ? What kind of orders can be entered?

A

3 intraday, 1 postclosing
Orders for all, next only and intraday crosses

39
Q

How can quotes be withdrawn? What are consequences?

A

Voluntary…
-sudden influx, losses, lack of interest
-MM excluded for 20 biz days

… or excused basis
-apply to NASDAQ
-granted for 5 biz days
-< 3 workstations and personnel on vacation, illness / act of God, passive MM, legal/regulatory (granted 60 days), failure to maintain clearing relationship

40
Q

What is the limit order display rule? What limit orders don’t need to be displayed?

A

Limit orders
-30 seconds to update quote (in normal conditions)
-if new order is equal in price but <10% of size, no need to update
-orders not displayed: odd lot, AON, block (10k sh or $200k), orders sent to qualifying ECN, immediately executable, if cutomer asks not to be displayed, sent to another MM that displays

41
Q

What is a Qualifying ECN?

A

communicate quotes to NASDAQ and allow access to non-subscriber BDs

42
Q

What is the Consolidated Audit Trail System? Deadline? Where does CATS info go? When is CATS not required?

A

Listed equities and options.
-CATS reports made by 8 am on T+1
-sent to central repository
-info on the order, customer, execution, MPIDs etc.
-if order is from BD’s normal MM or trading activities, it’s not required to be included in CATS

43
Q

What is the Manning rule?

A

-A firm (MM) can’t compete with it’s own customer’s limit order
-60 seconds to execute customer’s order if they execute order at price that would satisfy customer limit from own account
-institutional orders or orders >10k sh or >$100k exempt

44
Q

What is the Automated Confirmation Trading Service? Deadline? What if ACTS can’t be used?

A

The Automated Confirmation Transaction (ACT) Service is an automated reporting service in use by Nasdaq exchanges. Parties such as brokers or market makers are required to enter all trade confirmations into the ACT system for matching and clearing, including trades done over-the-counter.

-Nasdaq, OTC, third market CQS, internal clearable transactions
-Must be reported within 10 s by MMs
-NMCES automatically reports to ACT
-others must use the Trade Reporting Facility TRF

45
Q

What is the ACT Trade Scan? To what trades does it apply to? Deadline?

A

-for non automatically reported trades
-used to enter, review, accept, decline or cancel transactions.
-can also change firm capacity in trade (Agent, Principal or Riskless Principal)
- < 20 mn after trade to enter

46
Q

Who reports to ACT/TRF?

A
  • if trade between two MMs: sell side (if phone), executing side (if not)
  • if two non MMs: executing side
  • if member firm & customer: MF

Executing party: receives order, provided quote

47
Q

What do ACT reports include?

A

ticker
price, excl commissions, markups, fees
NOSH (round lots)
bought sold or crossed
short?
time if reported late (>10 s)

A cross trade also occurs legitimately when a broker executes matched buy and a sell orders for the same security across different client accounts and reports them on an exchange. For example, if one client wants to sell and another wants to buy, the broker could match those two orders without sending the orders to the stock exchange to be filled but filling them as a cross trade and then reporting the transactions after the fact but in a timely manner and time-stamped with the time and price of the cross. These types of cross trades must also be executed at a price that corresponds to the prevailing market price at the time.

48
Q

What happens if a firm can’t report to ACT? What is exempt from reporting to ACT?

A

Firms that can’t report to ACT must file Form T weekly

Exempt from reporting to ACT: PPs, primary & secondary distribution, transactions reported auto. by other system, execise of option / conversion, gifts

49
Q

What is a Step out trade?

A

trade exectued by a BD but assigned to another BD

50
Q

What are the restricted periods prohibiting syndicate participants from bidding or buying a syndicated security? Reg M, Rule 101

A

<$100k (ADV) or <$25M (float) => 5 d before effective date
$100k-1M or $25-150M => 1 d
>$1M or >$150M => 0 d

51
Q

What can’t issuers or selling shareholders do during the restricted period? Rule 102

A

can’t bid or purchase or encourage others to do so

52
Q

What are the restrictions for market-makers participating in a syndicate ? (application, purchase limits) Rule 103

A

-MMs in syndicate can only act as passive MMs => can’t bid or buy at price > highest bid entered by independent party
-Syndicate leader applies for whole syndicate 1 biz day prior to first trading day of restricted period
-PMMs daily purchase limit: greater of 30% of ADV or 200 sh

53
Q

What are the restrictions regarding stabilizing bids in secondary market? Rule 104 (price, how many can be entered?, what kind of offering can be stabilized?, what form is filed?)

A

stabilizing bid in secondary market: at or below issue offering price

except, if market is open, if security traded day before or on day of stabilization beginning and if offering price >= to last independent trade. in this case, SB max highest independent bid.

only 1 SB can be entered

MM entering SB must file Underwriting Activity Report before end of first day it entered stabilizing bid

only fixed price offering or firm commitment may be stabilized

syndicate manager must record short position info within 30 days of effective date

54
Q

Syndicated securities and short positions (Rule 105)

A

can’t purchase subject securities to cover short est. during restricted period (starting 5 days before pricing the issue)

Only applicable to firm commitment offerings

55
Q

What is the Trade Reporting and Compliance Engine? In normal hours, what is the deadline?

A

The Trade Reporting and Compliance Engine is the FINRA-developed vehicle that facilitates the mandatory reporting of OTC transactions in eligible fixed income securities
(all except munis, repos, money market, foreign gov)

time of execution: need to report
8am-6.15pm: <15mn
6.15-midnight: T+1 by 8.15am
midnight-8: by 8.15am
non biz day: next biz day by 8.15am

reports include key info + commissions, contra party, CUSIP etc.

disseminated info by FINRA: symbol, nb of bonds, yield, price, CUSIP

56
Q

What is the difference between how brokers and dealers charge their fees? and their obligations to disclose the amount ?

A

Broker: charges a commission and must disclose amount.

Dealer: charges a markup or markdown but doesn’t need to disclose amount

57
Q

What fee is considered reasonable by FINRA?

A

5% fee considered reasonable by FINRA

if small amounts, BD can charge more

58
Q

On what price is the maximum markup based on? (5% rule)

A

Max markup is based on current quote, not price the dealer paid for the security

59
Q

What is a Riskless principal transaction? On what price is the 5% rule based here?

A

-BD receives an order and then goes to buy it in the market as an intermediary to sell it to its customer right after.
-5% rule here is based on price paid for security, not on inside market

60
Q

What are proceeds transactions? And how does the 5% rule apply here?

A

Proceeds transaction: customer sells security A and buys sec B on same day.
5% can be charged in total, not for each

61
Q

What are Dominated & controlled markets ? And how does the 5% rule apply here?

A

MM has monopoly or oligopoly
5% based on price paid, not inside market

62
Q

What is a net basis trade?

A

“riskless principal” trade (meaning a simultaneous purchase and sale of the same security), but where the offsetting purchases and sales are at different prices.
NBT is reported as 2 trades

63
Q

What does it mean to execute an order on a net transaction basis? And what are the requirements?

A

BD receives customer order => execute the order on a principal basis with another broker dealer => fills the order at a net price to the customer

must obtain customer’s prior consent of non-institutional customers. Instit. => negative consent letter possible

64
Q

What does backing away mean?

A

MM not honoring a quote under the Firm Quote Rule. Violation.

65
Q

Firm Quote Compliance System

A

interface where firm can file “backing away” complaint within 5 mn of incident

66
Q

What happens if Trade (Nasdaq) complaints between members?

A

file to Nasdaq Market Operations within 30mn of trade

then, both parties have 30mn to submit documentation

67
Q

What is the minimum vacation for traders?

A

Traders must take mandatory 10 biz day vacations per year (otherwise, red flag that they’re conceiling losses)

68
Q

What are the different kinds of arbitrage strategies?

A

Market: buy & sell on different markets
Security: convert or exercise and then sell
Risk: merger arb

Series 24 (11 decks)

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