Chapter 4 - Trading Securities Flashcards
Market Order
An unpriced order that guarantees the investor an execution.
Buy –> at lowest/best offer
Sell –> at highest/best bid
Limit Order
Guarantees price, but not execution.
Sell stop order
Used to protect a profit or limit a loss on a long position. May also be used to establish a short position.
Examples:
Sell 100 XYZ @ 63 Stop - If XYZ trades at or below 63, the order will be elected and become a market order.
Sell 100 XYZ @ 63 Stop limit - If XYZ trades at or below 63, the order will be elected and become a limit order to sell XYZ at 63
Buy stop order
Used to protect a profit or limit a loss on a short position. May also be used to establish a long position.
Example:
Buy 100 XYZ @ 68 Stop - If XYZ trades at or above 68 the order will be elected and become a market order to buy XYZ.
Buy 100 XYZ @ 68 Stop limit - If XYZ trades at or above 68 the order will be elected and become a limit order to buy XYZ at 68.
All or none (AON)
As the name implies, indicate that the investor wants to buy or sell all of the securities or none of them. The investor will not accept a partial execution.
Fill or kill order (FOK)
The investor wants the entire order executed immediately or the entire order canceled.
Immediate or Cancel (IOC)
The investor wants to buy or sell whatever it can immediately and whatever is not filled is canceled.
Not Held
The investor gives discretion to the floor broker as to the time and price of execution.
MOO or MOC orders
The investor wants its order executed on the opening or closing of the market, or as reasonably close to the opening or closing as practical. If the order is not executed, it is canceled. Partial executions are allowed.
Where orders are placed (SLOBS & BLISS)
SLOBS –> Sell Limits & Buy Stops are placed above the market
BLISS –> Buy Limits & Sell Stops are placed below the market
VWAP orders
Large institutions will often place orders to be executed at volume-weighted average price (VWAP).
To determine the VWAP, the total dollar value of the trades must be added together and divided by the total number of shares purchased.
Adjustments for stock splits
For shares, take the number of shares and multiply by the fraction (e.g. 3:2 stock split multiply shares by 3/2).
For the price, you multiple the reciprocal of the fraction.
Commission house broker
Commission house broker is an employee of a member organization who executes orders for the member’s customers and for the member’s own account.
Two Dollar Broker
A two-dollar broker is an independent member who executes orders for commission house brokers when they are too busy managing other orders. The name originated from the practice of charging $2 commission for every 100 shares contained in an executed order.
Super Display Book
Customer orders will be electronically routed directly to the trading post for execution via the super displayed book. The SDBK bypasses the floor broker and since the order right to the DMM for execution.
Designated Market Maker (DMM)
Is an independent exchange member who has been assigned a stock or group of stocks for which he or she is the DMM.
DMMs are responsible for:
- Maintaining a fair and orderly market for the securities
- Buying for their own accounts in the absence of public buy orders
- Selling from their own account in the absence of public sell orders
- Acting as agents by executing public orders left with them
- Displaying quotes for their own account at the inside market a certain percentage of the time
- Determining the opening and closing prices for securities and providing price discovery
Supplemental Liquidity Providers
Off-floor entities with direct access to the SDBK to bid an offer for their own account.
The supplemental liquidity provider must reflect a bid or offer that is part of the inside market, the best market, at least 10% of the time. They are there to help provide additional liquidity to the securities on the floor.
NASDAQ
Not located in a specific location.
Level I - Shows only the best market. Nasdaq best bid/best offer (NBBO). This is displayed to registered reps.
Level II - Shows inside market as well as bids/offers from market makers away from the market. Used by order entry firms to direct orders/execute orders in the NASDAQ system with market makers.
Level III - Has all the features of LI & LII for market makers only.
Short sale
An investor who believes that a stock price has appreciated too far and is likely to decline may profit from this belief by selling the stock short.
In a short sale, the customer borrows the security in order to complete delivery to the buying party. The investor sells the stock high hoping that it can be bought back and replaced at a cheaper price.
The concept for short-selling: Borrowing friend’s car, selling it at a higher price, buy a replacement car at a lower price to return to friend, and keeping the profit.
Long position as asked by exam: the person has entered into an unconditional contract to acquire the securities but has not yet done so. That means the person bought the stock yesterday and the trade hasn’t settled. That person is deemed to be long.
Affirmative determination
All sell orders must be marked either long or short. The firm must make a determination if the customer is long the security or if the customer is selling short. If the customer is selling short, the firm must determine if the security can be borrowed for delivery.
Regulation SHO
Under the regulation SHO, the SEC has prohibited any SRO from adopting any price criteria as a requirement of executing a short sale.
Note: Easy to borrow list must be updated daily.
Exceptions:
- To complete delivery when customer fails to deliver
- Security is loan to another broker dealer
- A fail from a good faith mistake
Rule 200
Details when you can mark an order long or short.
A person is considered long security if the person holds a security future contract and has been notified that he or she will receive the underlying security.
A broker-dealer must aggregate its net positions in securities unless it qualifies to allow each independent trading unit to aggregate its positions independently.
The order marking requirements of rule 200 require the broker-dealer to mark all orders long, short, or short exempt.
Rule 203
A broker-dealer may not accept an order to sell short an equity security for the account of a customer or for its own account without having borrowed the security, having arranged to borrow the security, or without having in a reasonable belief that the security can be borrowed.
Third Market
Listed stock trading on NASDAQ workstation.
A transaction in an exchange-listed security traded over NASDAQ.
Example: You need 3 new shirts. You can buy at the mall or buy online.
OTCC BB and Pink OTC
In order to trade, must be a reported issuer (files quarterly reports and material events with SEC - 10K, 10Q, 8K).
The dealer is required to file form 211 with FINRA at least 3 business days prior to entering a quote. If there are changes prior to approval, the del
Circuit breakers
The NYSE, NASDAQ, and SEC continue to develop and test circuit breakers that will act as a safety net during times of exorbitant price changes in the market as a whole or in the price of individual securities.
Once a level is reached, it will not halt again until it reaches the next level circuit breaker.
SEC rule 201 prohibits the shorting of covered securities which consist of NYSE, NASDAQ, and AMEX listed equities at the bid price if the price of the security has declined 10% or more from the previous day’s close.
Limit Up Limit Down (LULD)
Ensures that prices of individual securities reflect fundamental price is based on supply and demand and do not move outside of established parameters based on errors or manipulative actions.
A 5-minute pause will occur if limit up or limit down reached with no trade for 15 seconds. The new reference price will be the opening price when the stock re-opens after the trading halt.
Due diligence file
2-sided quote
NBBO will select the best bid & ask independently for display.
Locked and crossed markets
A locked market is one where the bid and offer are equal in price.
A crossed market is one where a bid is entered that is higher than the offer, or one where an offer is entered that is lower than the bid.
Market makers may not enter quotes that would lock or cross the market.
Nominal quotes
Dealers who provide quotes over the phone, which are clearly indicated as being subject or nominal, cannot be held to trade at those prices.
Electronic Communications Networks (ECNs)
The electronic communication networks (ECNs) operate independently of FINRA. ECNs display and execute third-party orders and are allowed access to the NMCES. ECNs are widely used by both broker-dealers and institutional investors to display and execute orders.
There are 2 types:
- The ECN may be full participation
- The ECN may be a order-delivery
Market Makers vs ECNs
A market center is:
- An OTC market maker
- A market maker that internalizes orders
- An alternative trading system
- A national securities association
- A national securities exchange
Market Centers
A market center is:
- An OTC market maker
- A market maker that internalizes orders
- An alternative trading system
- A national securities association
- A national securities exchange
Regulation NMS
SEC regulation NMS requires market centers to establish and enforce policies and procedures to ensure that trades do not get executed at inferior prices to those protected prices displayed in other market centers.
NASDAQ opening cross
NASDAQ closing cross
NYSE close
Withdrawing quotes
A market maker may withdraw quotes for a security in two ways: voluntary or excused.
Voluntary (bad)
- trading losses
- influx of orders
- lack of interest
Excused (must give 1 business day notice)
- 3 or fewer work stations to cover for holidays & vacations. Excused for 5 business days.
- Legal reasons - up to 60 days excused
- Passive market making
The Manning rule
Is a broker-dealer required to accept customer limit orders? No, they are not. But they do require special handling.
The Manning Rule details the requirements for special handling.
Price improvement
The minimum price improvement is 1 cent.
Order Audit Trail System (OATS)
OATS tracks an order through each stage of its life, from receipt to execution or cancellation to ensure orders are handled and routed in a timely manner.
Firms are required to submit daily electronic OATS reports to FINRA by 8am trade date + 1.
Firm Quote Compliance System
Ensure market-makers are not engaged in a violation known as “backing away”.
Automated Confirmation System (ACT)
Occurs once a trade is made.
Test point: Know what ACT does and does not do.
Reporting trades to ACT
Test tip: Know the 10-second timeframe for reporting and 20-minute timeframe for accepting.
Memory tip: OTCBB & PINK OTC use Order Reporting Facility (ORF)
The price reported to ACT is the wholesale price exclusive of commissions & markups (the protected price).
Trade Reporting and Compliance Engine (TRACE)
