Chapter 7 - Securities markets Flashcards
Different Types of Orders can be used on…
Common stock, preferred stock, bonds, and options
Market Order
Buy or sell a security at the best price that is available when the order reaches the market place
Market orders at the opening…
Always have priority over limit orders
Limit order
Order to buy or sell a security at a set, specific, price or better
Limit order are good till
Either good for the day (Day Order), can be partially executed and if so the rest of the order will be canceled at the end of the day
or
Good till canceled - (GTC or open orders)- Renewed twice a year, in April and October.
Some firms allow GTC orders that are good for a week only or a month only
Permitted for round lot (100 shares) or odd lot
Stop Order
Memo for an order when a trade is placed at or through a specified price.
the order then becomes a market order an a sale price can not be guaranteed
Stop order protects long position by
using a sell stop order
Stop order protects short position by
using a buy stop order
NYSE and Nasdaq no longer accept
GTC or stop orders
Brokers can continue to offer these order types to their customers for execution in other markets
Adjustment to orders
If an adjustment is required for cash dividend or distribution, unless marked “do not reduce”, buy limit and sell stop order prices will be reduced by the full dollar amount of the dividend or distribution
Reverse splits and open orders
All open orders must be cancelled
How are limit orders reduced
On the Ex-date the market maker, before the markets open, will automatically make reduction
It will be reduced by the actual amount of the dividend
Stop orders impact on the market
Buy stops - speed up the rise in a bull market
Sell stops will speed up a decline in a bear market
Stop Order and broker discretion
Stop orders do not give the broker discretion over the time and number of shares since once the stop order is activated it becomes a market order
Buy stop orders and resistance levels
A buy stop order can be used to take advantage of a break in a the resistance level for a security
Cancel Former Order (CFO)
this is an order that cancels the buy stop order and purchases stock at the current market value. Must go down on the same ticket
A stop limit order is entered..
Is first always a stop order. But instead of the stop order turning into a market order it then becomes a limit order
American Stock Exchange (Amex and Curb) accepting stop orders
They will only accept stop orders if they are stop limit orders
Fill or Kill Order (FOK)
Must be executed at once in its entirety or it will be cancelled.
Immediate or Cancel (IOC) order
Must be executed at once in its entirety or partially. If it is partial the remaining balance is canceled
All or None (AON)
Must be executed in its entirety but not immediately
At the opening orders
If they are not received on the trading floor before opening, it will be canceled
At the close orders
They will be executed at or near the near of the trading day but no guarantee that it will be the last trade of the day
Odd lot ticket order
Are now filled on a single order ticket
Alternative orders
Two order to buy at either a low price or a high price. The execution of either will cancel the other
If the order is only partially filled the amount of stock filled will be reduced from both orders
Sell order indications
All sell orders must indicate whether they are selling a “long” or “short” position
Order Flow through a Brokerage Firm
- Wire Room
- Purchase and sale Department
- Margin Department
- Cashier’s Department
Cashier’s Department in a Brokerage firm is responsible for
Broker and bank deliveries
customer account transfers
Bank Loan
NOT responsible for transmittal of orders for execution
Reorganization Department is responsible for
The exchange of one security for another
Mark-Market
The adjusting of the price of a security or portfolio to reflect current market value.
Most important in a Margin account
Used to ensure compliance with margin maintenance requirements
Regulation NMS (national Market System)
SEC regulation to help modernize NMS for equities securities. Ensures investors receive best price execution for their order
Regulation NMS (national Market System) Requirements
Access to quotes must be immediate and automatic
and
The execution of trades place at a price that is at or better than the national best bid or offer (BBO)
Brokers
Bring together buyers and sellers on an exchange and is paid a commission for this service
Dealers
Acts in a principal capacity, which means they buy and sell from their own inventory of stocks and are paid based on the spread between the buy and sale price
Mark ups and commissions
A customer can be charged either a mark up or a commission but not both
Market-on-close and Limit-on-close orders
Must be entered electronically by 3:50pm. Can be cancelled or reduced up until 3:50pm. They can not be canceled or reduced after 3:50pm, no exceptions even to correct legitimate errors
NYSE Rule 7.12
If trading is halted for the day all MOC and LOC orders will be canceled and NYSE crossing sessions may not take place
Short sales can only be done in
a margin account
and are marked to marked daily
Prior to the short sale
The firm must confirm that it has the security available to be borrowed by the investor before the short sale is submitted for execution
This is referred to as a “locate” under regulation SHO
Stock borrowing length of time
Can be indefinitely but the firm can demand it be returned at any time
Risk Arbitrage
when someone wants to profit from a merger or acquisition
Short against the box
If a customer is long a stock in their account and shorts that same stock
Done for either arbitrage or hedge against anticipated decline
Short against the box and selling/tendering stock
If you are short against the box and want to sell your share you must list it as a short sale
If they want to participate in a tender offer they must have a net long position
Trade reporting Facility (TRF) is used…
For trades that occur OFF the floor of an exchange
EMMA - Electronic Municipal Market Access
It is the official MSRB source for:
Official statements
Continuing discourse documents
Advance refunding Documents
Real time trade price information
Real Time Transaction Reporting
Each trade of a municipal bond must be reported within 15 minutes to the National Securities Clearing Corporation.
Much slower then the 10 second requirement of stocks due to the fact that most of the municipal bond market is not electronic
Designated Market Marker
Key individual on the trading floor
Required to maintain a fair and orderly market in the securities assigned to them
Designated Market Markers typically act as a
broker- executing trades for other members and receiving a commission
But they can act as a dealer and buy and sell from the firms own account
Designated Market Makers handle
Market orders
Open orders
and day orders
They do not handle “Not Held” orders
Important Info about Designated Market Maker
Does not participate in IPO
Can contact potential buyers when a large influx of sell orders come in
Execute odd lot orders but they are not reported to the tape
Stopping Stock
The customers price is guaranteed (for a limited time)
The order must be solicited by the floor broker not the designated market maker
there must be at least a 2 cents spread between the bid and the ask
OTC vs. Exchange traded stock symbols
OTC stocks are typically 4 symbols where an exchange traded stock is usually 1-3 characters
Designated Market Makers own accounts
Must bid higher then any offer on their book to buy and must offer lower than anything on their book as a sale
Auction Procedures
When orders are entered on the floor of an exchange, competitive bidding occurs and orders are executed based on Priority (larger orders get priority over smaller orders and market orders get priority over limit orders),
Parity (orders with matching size)
, and precedence (orders that were received first
but never premiums
Registered Reps and the NYSE trading floor
RR are not allowed to trade on the NYSE trading floor
NYSE order ticket contain
Type of order
Time of entry
Designation of the Customers account
Commissions will not appear on the order ticket
Universal Trading Platform (AKA Designated order turnaround (DOT) system)
Automatically executes market and limit orders
All NYSE stocks are eligible
Reports back instantaneously
Used by individuals and institutions
There ARE size limitations
Must be reported within 10 seconds of execution
Market Trading Halts
Happen when the S&P500 index drops a certain % from the previous day’s close
Market Trading Halt values
Level 1 - 7%
Level 2 - 13%
Level 1 and 2 are only active from 9:30am until 3:25pm and result in a 15 minute halt
Level 3 - 20% - can happen anytime and result in halted trading for the rest of the day
Nasdaq will also halt trading in according with the NYSE trading halts
Ticker Tape Reporting
The tape reports the sell side only on a transaction
Common stock, preferred stock, warrants and rights are reported
Odd lots and options are not reported on the tape
Commissions are not reported on the tape, execution price only
OTC Markets
All securities trades that take place off of a listed exchange
Listed Securities
Are traded by designated market makers on an exchange
Unlisted securities
are traded by market makers in the OTC market through their own inventory
Prices on an OTC market
Determined through negotiation between a seller and the market makers
Information about OTC
Number of securities traded on OTC is greater than all exchanges combined (number of securities not dollar volume of trades)
Stocks of most banks and insurance companies are traded OTC
Most symbols are 4 characters
Market Maker in OTC
maintain a firm bid and offer price in a given security by standing ready to buy or sell from their own inventory at a publicly quoted price
Can take long or short positions at any time
Must report trading volume daily
Not required to disclose profit or losses on their inventory positions
Value moves of stocks
If the price or a stock is greater then $1.00 is must move in at least $0.01 increments
If the price of a stock is less then $1.00 it can move in sub-penny increments
Firm quote
Means the market maker is trade at least 100 shares of a stock at the quoted price
Subject quote
Provides information only and is subject to change
Workout market
Used for a thinly traded stock where it is a subject quote that provides an estimated price range that a dealer feels then can obtain the security within a reasonable period of time
Narrow vs wide spread implications
Narrow spread indicate an actively traded stock
A wide spread indicates a less active stock
Markup policy
Is the 5% guideline that must be used when calculating mark ups/down transactions
Pink Sheets
Always subject quotes
Published daily
No not meet requirements to be on NASDAQ
Market price less than $5/share
Thinly traded which makes them more volatile
inter dealer quotes
Before sold RR must disclose the bid/offer and compensation paid to both the RR and the firm in the trade
Must provide risk disclosure statement
Must provide monthly (not quarterly) statements
5% markup policy
The 5% policy if added to the price that a buyer must pay and taken from the price the seller receives (but there is no commission)
Mark up policy does not apply to…
New issues, registered secondary distributions or open end investment shares (mutual funds)
OTC trading level
Pink sheets (designated securities)- market price of less than $5.00 per share
NASDAQ- worlds largest electronic stock market
Penny Stocks are on…
The OTC markets only.
A stock on the exchange that is under $5.00 does not have a special name
Before selling a penny stock an advisor must…
Determine suitability for the customer
send the customer a copy of the suitability determination
And they must receive back a copy of the suitability determination that is signed by the client
Exemption to penny stock disclosure rules
Transactions with institutional accredited investors
Transactions that satisfy Reg D
Transactions where the customer owns 5% or more of the stock of the company
An established customer if the RR did not make the recommendation
NASDAQ’s two markets
NASDAQ Capital market- includes small cap securities
NASDAQ Global Market - Includes large cap securities
NASDAQ Reporting
Subject to real time reporting in 10 seconds or less, for round lot trades
Last sale prices are displayed in the system
Reports to news media the inside market (highest bid and lowest ask by all market makers)
Suspended Trading on NASDAQ
Can be done at either:
The request of the company
Pending an announcement
If the net worth of the company declines below a certain amount
Not suspended if the company issues non-voting common shares
NASDAQ Quote levels
Level 1- used by RR and gives inside quote. These are subject quotes
Level 2 - Firm quotes for at least 100 shares of stock. Used by OTC traders and gives quotes for each market maker
Level 3- Firm quote, Used by registered market makers. Allows market maker to change their big and ask quote throughout the day
Basic Cable
Premium Cable
Premium+ sports
To be quoted on NASDAQ…
Have at least two registered market makers
Have a minimum number of shareholders
have a minimum number of shares outstanding
No waiting period once its registration becomes effective
Consolidated Quotation Service (CQS)
Provides the current and continuous best quote (bid and ask) in the system for all listed (trading on the floor of an exchange) securities in the system
Electronic Communication Network (ECN)
Privately owned electronic order execution systems that display, match and execute order on listed AND OTC securities.
Generally route order away from exchanges and OTC so that you can get better execution prices.
Do not maintain their own inventory
Must register with the SEC
3rd Market
Where listed (exchange) securities are traded OTC
4th Market
Where financial institutions trade directly with each other Commissions are typically lower
Instinet (INET)
was the first and one of the largest ECNs
Provides quotes for and handles many large block trades executed on the 4th market
participants can trade anonymously
trades do not cross on the floor of an echange
Regular way settlement
Common stock
Corporate Bonds
Government Bonds
Municipal Bonds
Options
Preferred Stocks
2nd business day - Common Stock, preferred stock, corporate bonds, and Municipal Bonds
1st business day - government bonds and options
Regulation T settlement
Most securities are 4th business day
Cash Transaction
Cash is required to be delivered on the day of the transaction
NYSE - cash transactions completed before 2pm are due by 2:30pm. Any made after 2pm are due within 30 minutes after the trade
Depository Trust Clearing Company (DTCC)
One of the worlds largest securities depositories
Created to reduce costs
Provides safekeeping and transfers securities electronically using bookkeeping entries
National Securities Clearing Corporation
The NSCC is a subsidiary of the Depository Trust Company (DTC). The NSCC provides centralized clearing, information, and settlement services to the financial industry including broker-dealers, banks, mutual funds, and insurance companies
Continuous Net Settlement (CNS)
Operated by NSCC
an automated settlement system that centralizes and matches the settlement of security transactions and money balance of its member participants
Settles all trades through equity securities, corporate bons and municipal bonds through NSCC. Eliminates window settlement
Fixed Income Clearing Corporation (FICC)
subsidiary of DTCC
Provides central clearing for government securities
Also handles Repurchase agreements and mortgage backed securities
Seller’s Option 180 day contract
Used to sell a stock when you will not be able to deliver the stock for more then 2 business days (regular way settlement) but within 180 days
Seller’s Option 180 day contract: buyers obligation
Seller must give buyer one days written notice before delivery
Buyer must deposit funds within 4 days after delivery
SEC Rule 15C3-3
Rule prescribes mandatory buy in period for customers who fail to deliver securities that they have sold
This regulates sellers, Reg T regulates buyers
Good Delivery
The stock or bond certificate is in a form permitting ownership to be readly transfered
Good delivery of stocks
Must be in units of 100 shares
Multiples of 100 shares
or combinations permitting 100 share units`
Odd lot good delivery
Good in any amount as long as they equal the amount of the odd lot
Assignment and power of substitution
Back of a stock certificate
Legal document
Must be signed on the back exactly as their name appears on the front
Assignment call a “stock power” or “bond power”
In a transfer, Broker Dealer will guarantee ..
the signature and the signature and guarantee must be accepted by the transfer agent
The following are acceptable signatures for a transfer agent
Stock in the name of:
an individual signed by the individual
each spouse as joint tenants signed by both spouses
a partnership signed by one of the general partners
a corporation signed by an authorized officer or officers
an estate signed by the legal representative of the estate
Stock help in an UTMA account signed only by the minor is not acceptable
Good Delivery of a bond with mutilated coupons
Must be authenticated by the issuer or transfer agent (not the broker dealer)
Handling of certificates by the transfer agent
cancels old certificates
issues new certificates
resolves problems with certificates that have been lost
Handling of certificates by the registrar
Maintain the stock record book
must account for all shares and prevent over issuance of shares
