Chapter 4 - Misc

Question 1

Short Sale-Related Circuit Breaker - SEC Rule 201

Answer 1

The circuit breaker is triggered for a security any day in which the price declines by 10% or more from the prior day’s close.

Question 2

A round lot that traded on the NASDAQ must be reported within

Answer 2

NASDAQ trades must be reported within 10 seconds of execution.

Reference: 4.9.8 in the License Exam Manual

Question 3

Automated Confirmation Transaction Service (ACT)

Answer 3

Compares trade information provided by market participants and submits locked-in trades for clearance and settlement. Also disseminates last sale information to the public. The FINRA/Nasdaq TRF operates on the ACT technology platform. Upload functionality for the ACT platform is available through the Nasdaq Workstation/Weblink ACT.

Question 4

Before placing a one-sided stabilizing bid, the manager must notify Nasdaq of its intention to place the bid and provide the following to Nasdaq

Answer 4

■ Whether the bid will be a penalty bid (PBID) or a penalty-free bid (SYND)

■A copy of the cover page of the prospectus

■Whether the syndicate will engage in any short covering

Question 5

Current Rule 80B - Level 1 Halt

Answer 5

S&P 500 drops 7% from the Previous Trading Day, 15 minutes, occurring after 9:30 a.m. Eastern and up to and including 3:25 p.m. Eastern, or in the case of an early scheduled close, 12:25 p.m. Eastern, would result in a trading halt in all stocks for 15 minutes.

Question 6

Current Rule 80B - Level 2 Halt

Answer 6

S&P 500 drops 13% from the Previous Trading Day, 15 minutes, occurring after 9:30 a.m. Eastern and up to and including 3:25 p.m. Eastern, or in the case of an early scheduled close, 12:25 p.m. Eastern, would result in a trading halt in all stocks for 15 minutes.

Question 7

Current Rule 80B - Level 3 Halt

Answer 7

If the S&P 500 Index declines by 20%, triggering a Level 3 circuit-breaker, at any time, trading would be halted for the remainder of the day.

Question 8

DMM Obligations

Answer 8

The DMM has an obligation to quote at the NBBO a specified percentage of the time.

■Not held orders cannot be accepted by the DMM.

■The DMM firm is responsible for setting the opening quote in stocks it represents.

■The DMM must meet strict depth and continuity standards

Question 9

During marketwide trading halts with a duration that will close the market for the remainder of the trading day, the following rules apply.

Answer 9

During marketwide trading halts with a duration that will close the market for the remainder of the trading day, the following rules apply.

■ Orders that are pending at the time of the halt and new orders received after the halt begins should be treated as good until canceled and held by the firm for execution at the reopening of the next trading session.

■ At-the-close orders pending at the time trading is halted should be canceled. At-the-close orders received after trading is halted should be declined.

■ The SEC is authorized by law to summarily suspend trading in any security (other than an exempted security) for up to 10 business days. The Commission also may summarily suspend trading on any national stock exchange for up to 90 calendar days but only if the President does not disapprove of its decision.

Question 10

Erroneous Reports

Answer 10

The price at which an order was executed is binding on the customer—even if the member provides an inaccurate report to the customer.

Question 11

Excused withdrawals are generally allowed for how many days as a Nasdaq Market Maker ?

Answer 11

5 business days

Question 12

For reverse stock splits, all open orders are ?

Answer 12

For reverse stock splits, all open orders, both above and below the market, are canceled.

Question 13

If a market maker fails to enter quotes within five business days after registration is effective,

Answer 13

the firm will be involuntarily terminated as a market maker in that security.

Question 14

If a market maker’s bid or offer is decremented to zero, and the firm is not using Automatic Quote Refresh, the firm must update its quote and size within how many seconds?

Answer 14

Once decremented to zero, the firm has 30 seconds to update. If, after 30 seconds, the firm does not update or voluntarily withdraw as a market maker, Nasdaq will automatically refresh its quote for 100 shares to $.01 away from the worst displayed price in the montage.

Reference: 4.8.3 in the License Exam Manual

Question 15

If a market maker’s displayed size has been reduced to less than one round lot, then…

Answer 15

When a market maker’s size is exhausted to less than one round lot, size may be replenished from reserve. In addition, firms can use AQR. In this case, the system will refresh the firm’s price and size by an increment and size designated by the firm. Also, the firm can manually update its quote. If, after 30 seconds, none of the above actions is taken, Nasdaq will automatically refresh the firm’s quote for 100 shares to $.01 away from the worst displayed price in QuoteView.

Reference: 4.8.3 in the License Exam Manual

Question 16

If securities delivered in an interdealer trade are refused by the transfer agent, the time frame for reclamation, under Uniform Practice rules, is ?

Answer 16

If securities accepted by a member in an interdealer trade are subsequently rejected by the transfer agent (for whatever reason), the time frame for reclamation is 30 months from delivery date.

Reference: 4.14.7 in the License Exam Manual

Question 17

Key Points of Rule 204

Answer 17

Key Points of Rule 204
Rule 204 applies to all equity securities.
The purchase or borrow of securities will not qualify as a closeout if the participant knows the securities will not be delivered by settlement.
Rule 204 requires that BDs track all fails to deliver from both long and short sales, and then borrow or buy-in a sufficient amount of stock to close out the fails at the beginning of regular trading on S+1 (in the case of short sales) and S+3 (in the case of long sales).
If the BD does not close out the position within that time period, it may be temporarily barred from effecting short sales in that stock for any customer unless it pre-borrows that stock.
Closeout requirements do not apply to Rule 144 stock.

Question 18

Limit orders that add liquidity by improving a market maker’s price or size must be displayed within how many seconds of receipt?

Answer 18

A customer order that improves a market maker’s price or size must be displayed immediately, which according to the SEC, means within 30 seconds of receipt.

Reference: 4.5.5 in the License Exam Manual

Question 19

Manning Rule

Answer 19

If a member firm executes a trade for its own account at or through a customer’s limit order price, the firm must execute the customer’s limit order within one minute. The firm need not execute a larger order for a customer than it executes for its own account.

Limit orders are protected between 9:30 am and 6:30 pm.

Question 20

Nasdaq MM Voluntary terminations requires how many days waiting period ?

Answer 20

20 business days

Question 21

participation in pre- and post-market trading sessions by market makers and ECNs is strictly

Answer 21

voluntary

Question 22

Reg NMS

Answer 22

An SEC regulation that fosters competition between markets/exchanges and competition among individual orders through four initiatives. (1)

The ‘‘Order Protection Rule’’ requires trading centers to enforce written policies designed to prevent trade-throughs. (2) The ‘‘Access Rule’’ requires fair access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires every exchange to enforce written rules that prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross automated quotations. (3) The ‘‘Sub-Penny Rule’’ prohibits market participant from accepting, ranking, or displaying orders, quotations, or indications of interest in a pricing increment smaller than a penny,except for orders, quotations, or indications of interest that are priced at less than $1.00 per share. (4) ‘‘Market Data Rules’’ amendments that update the requirements for consolidating, distributing, and displaying market information

Question 23

Rule 611—Order Protection Rule

Answer 23

The rule states that a trading center, such as Nasdaq or the NYSE, enforcewritten policies and procedures that are reasonably designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks.

See - trade-through, Regulation NMS.

Question 24

The advantage of being a primary market maker in a Global Market stock is that it allows the market maker

Answer 24

an exemption from the locate requirement of Regulation SHO in certain transactions. If a market maker is a primary market maker in a particular stock, a .P indicator is displayed next to its identification symbol.

Question 25

Threshold Security

Answer 25

Any equity security of an issuer where, for five consecutive settlement days, there are fails to deliver at a registered clearing agency of 10,000 shares or more, and the level of fails is equal to at least one-half of one percent of the issue’s total shares outstanding.

The appropriate SRO updates its threshold security list daily. A security ceases to be a threshold security if it does not meet or exceed the specified levels for five consecutive settlement days

Question 26

To qualify for NYSE listing, is their an EPS requirement ?

Answer 26

Though the numerical values are not tested, note that there is no minimum earnings per share (EPS) requirement to qualify for NYSE listing.

Question 27

Under a T3 modifier, the period between the time a market maker can begin quoting a stock and trading a stock is referred to as the

Answer 27

There is a 5-minute window that allows market makers to adjust their quotes before the reopening of trading.

Reference: 4.5.13 in the License Exam Manual

Question 28

With respect to penny stocks, what is an established customer ?

Answer 28

An established customer is one who has effected a securities transaction or made a deposit of funds or securities into his account at least 1 year prior to the proposed penny stock trade, or has made 3 purchases of penny stocks on 3 separate days involving 3 separate issues. Established customers are exempt from the suitability statement required by 15(g)9, but are subject to the disclosure rules required by 15(g)2-15(g)6.

Reference: 4.6.2.5 in the License Exam Manual

Question 29

Your firm is the sole market maker in WXYZ common stock. At month’s end, the stock in your firm’s trading account is valued at $300,000. For net capital purposes, the value of your inventory is

Answer 29

zero

As the sole market maker, there is no one else to purchase your inventory in the event your firm gets into difficulty. Therefore, this inventory is considered an asset for which there is no ready market. Accordingly, it is a nonallowable asset for capital computation purposes. Put another way, it is subject to a 100% haircut.

Reference: 2.11.8 in the License Exam Manual

Question 30

Duration of Price Test Restriction - Sec Rule 201

Answer 30

Once the circuit breaker has been triggered, the rule applies to short sale orders in that security for the remainder of the day, as well as the following day.

Question 31

Securities Covered by Price Test Restriction - Sec Rule 201

Answer 31

The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.

(not OTCBB or Pink Open Market

Question 32

Can FINRA halt trading on an exchange ?

Answer 32

No

Question 33

Where can FINRA halt trading ?

Answer 33

Although FINRA does not have the authority to halt trading on an exchange, it may initiate trading halts or close its Alternative Display Facility (ADF) or any Trade Reporting Facility (TRF) to quotation and/or trade reporting activity. This occurs if it determines there is a basis for it, such as to permit dissemination of material news or extraordinary market activity.

Question 34

Supplemental Liquidity Providers

Answer 34

A class of off-floor, electronic market maker that is permitted to compete with the DMM is known as a supplemental liquidity provider (SLP). SLPs are required to maintain in round lots a bid or an offer at the National Best Bid (NBB) or the National Best Offer (NBO) at least 10% of trading day for any security they are assigned

Question 35

T1 Halt

Answer 35

News pending : Trading is halted pending the release of material news

Question 36

T2 Halt

Answer 36

News released : The news has begun the dissemination process through a Regulation FD compliant method(s).

Question 37

T3 Halt

Answer 37

T3 Halt - resumption times

: The news has been fully disseminated through a

Regulation FD-compliant disclosure method. Nasdaq determined that system misuse or mal-function that caused extraordinary market activity no longer has a material effect on the market for the security, or that system misuse or malfunction is not the cause of the extraordinary market activity, or Nasdaq determined the conditions that led to a halt in an ETF are no longer present. Two times will be displayed: (1) the time when market participants can enter quotations, followed by (2) the time the security will be released for trading. All trade halt and resumption times will be posted in HH:MM:SS format.

Question 38

How long is the window for market makers to adjust quotes post a trading halt ?

Answer 38

There is a five-minute window that allows market makers to adjust their quotes before the reopening of trading.

Question 39

Accrued Interest is payable by the ?

Answer 39

Accrued interest is payable by the buyer to the seller. It is added to the buyer’s purchase price. The seller receives the accrued interest, so it is added to the seller’s proceeds.

Reference: 4.14.3 in the License Exam Manual

Question 41

When must the POP be notified to NASDAQ by the syndicate managers ?

Answer 41

The syndicate manager must notify Nasdaq by 6:45 pm on the night before the issue is released for trading as to what the public offering price (POP) will be.

Question 42

POP Quotation Period

Answer 42

The POP will be the first bid during the 15-minute quotation period. Market makers must quote the issue for 15 minutes before any trades can be executed. Any trades executed during this period represent a violation of FINRA rules

Question 43

Nasdaq-listed companies must notify MarketWatch

Answer 43

Nasdaq-listed companies must notify MarketWatch at least 10 minutes prior to the release of important news to the general public during Nasdaq/MarketWatch market hours (4:00 am to 8:00 pm ET). Notification by listed companies must be provided to MarketWatch through the Electronic Disclosure submission system

Question 44

MarketWatch generally implements trading halts from ?

Answer 44

MarketWatch generally implements trading halts from 7:00 a.m. – 8:00 p.m. ET

Question 45

temporary trading halts

Answer 45

Between the hours of 4:00 am and 7:00 am ET, temporary trading halts also may be administered at the request of a NASDAQ-listed company in anticipation of the release of material news, or if trading in the stock is halted in a foreign market.

Question 46

interdealer trades are reported and submitted to

Answer 46

National Securities Clearing Corp. (NSCC) for clearance and settlement. NSCC works on a continuous net settlement (CNS) basis (interdealer buys and sells, per security, are netted each day for delivery and money settlement purposes).

Question 47

Who determines settlement of when issued ?

Answer 47

Settlement of when-issued contracts is determined by the Uniform Practice Committee after a sufficient percentage of the issue is outstanding.

In the event the Committee does not declare a delivery date, delivery may be made by the seller (e.g., syndicate) on the business day following written notice of intent to

deliver.