Chapter 4 - NASDAQ Trading Rules

Question 1

NASDAQ Market Maker min quote size

Answer 1

100 shares

Question 2

Market makers are prohibited from displaying a bid for an NMS stock that either locks or crosses the market from what time period ?

Answer 2

During the hours of 8:00 am to 6:30 pm ET,

Prohibition from Locking or Crossing (FINRA Rule 6240)

Question 3

Under Reg SHO, if the customer borrows stock to effect delivery, the order ticket must be marked

Answer 3

short

Question 4

Are sales marked short-exempt are subject to the provisions of Regulation SHO ?

Answer 4

No - Short sales by primary market makers in connection with bona fide market making activity are short-exempt.

Question 6

Under SEC rule 203, delivery must be made within how many days of trade date ?

Answer 6

Under SEC rule 203, delivery must be made within 35 calendar days of trade date. If not, the firm that handled the sale must take immediate steps to close out the fail to deliver by purchasing or borrowing the securities.

This 35-calendar-day rule also applies to stock sold under Rule 144.

Question 7

Short Sale-Related Circuit Breaker - SEC Rule 201

Answer 7

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 8

Threshold Security

Answer 8

Any equity security of an issuer where:

1. for five consecutive settlement days, there are fails to deliver at a registered clearing agency of 10,000 shares or more,
2. 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 9

Key Points of Rule 204

Answer 9

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 10

If a market maker or any participant of a clearing agency registered with the SEC (e.g., the NSCC) has a fail to deliver position in a threshold security open for how many days, then ?

Answer 10

10 business days after settlement (13 consecutive settlement days), the firm must immediately close the position by purchasing the securities, or it may not engage in any short selling activities without first having borrowing or entering into a bona fide agreement to borrow the security.

Question 11

True or False - if a market maker has a fail to deliver in a threshold security for 13 consecutive settlement days, it may not effect another short sale in that security until it either closes out the fail by purchasing the securities or pre-borrows the stock

Answer 11

True