Customers Orders Flashcards
Order ticket aka order memorandum
Execution report
Customer confirmation- normal vs
when-issued trades
Customer confirmation- retention?
Order ticket/ order memo
BD execution of order
-What is the order (buy sell, what?)
- Long v short (reg SHO)
- security identifier or CUSIP
- Cash or margin
-Terms & conditions to execute
-Acc# (not name); RR identifier
-How order was received
-Solicited, unsolicited; discretionary?
-Time received & entered
Allows firm & regulators to review if complaints, disputes, irregularities
Tickets-
-Must be prepared prior to order entry
-Promptly reviewed by principals (us. by EOD)
-Changes are subject to principal approval (ex: correction of a mistake? They have to review & approve. If RR spots the mistake, just tell principal- DON’T try to fix it themselves)
Unsuitable orders?
-must be placed if customer insists
-marked “unsolicited”
-should note interaction in customer file
* * * * * * *
Order ticket checked against Execution report. All good? Send written confirmation to customer.
Problem? Report to principal & don’t touch.
Principal documents issue & resolution, approves any changes. Documentation retained 3 years
* * * * * *
Written trade confirmation given/sent to customer at or before settlement
Execution & settlement dates
Customer funds- $$ to or from customer
What is being bought/sold- ID of security, price, # shares
Role of BD- market maker? Agent v principal capacity? Control relationship? Dual Agent?
Fees- commissions (incl source), markup/markdown, other fees (mailing etc), any deferred sales loads (description)
debt security info- total par value, accrued interest, YTC (or YTM) whichever is lower
* * * * * *
new issue Municipal bonds typically sold before issued & available for delivery-
SAT are the unknown pieces of info:
-settlement date
-accrued interest
-total $$ due at settlement
TWO trade confirmations-
First- when- issued
SAT is missing
When issued trade confirm incl:
-Description of security
-Purchase price or yield (serial bond)
-Trade date
Once issued, new confirmation-
Includes settlement date, accrued interest, TOTAL purch price (SAT)
3 years retention
Market order
Have priority over all other orders
“Do it now, whatever the cost”
Buy/sell immediately at whatever price is available
investor objective =immediate execution
Guaranteed execution but not price
Always fully executed
Investors usually avoid placing overnight
Default is “day order”
Limit order
Risks
Stock ahead
Price guarantee, but no execution guarantee
Do it if you can get the price I want “or better”
If you can’t get my preferred price or better, the order won’t be executed
Limit orders are filled at the first price that satisfies the limit.
Can be partially executed.
Caps profits.
Day order or GTC (good til cx)
SLoBS over
BLiSS
Are orders placed above market or below?
If dividends are declared, does order adjust on ex-dividend date?
Use Buy Limit when you believe the security is overpriced
Use Sell Limit when you own stock and think it’s undervalued
Risk- may not be fulfilled bc mkt doesn’t reach the limit
Or
Mkt reaches limit but an order placed before yours (stock ahead) took precedence
Stop order
Why would you place a Buy Stop (BS) order? vs technical trader?
Why would you place a Sell Stop (SS) order? vs technical traders?
What is gap risk?
AKA stop loss. May use in very volatile market to limit losses. Ex: expect volatility in your stock just before its time to close trades.
No guarantee of execution or price
(May not need it, but if you do you can’t be sure what price it will be executed at)
If market price hits a figure I designate (the “trigger”), it becomes a market order.
Now it’s “do it now at whatever price”
If triggered, this gets fully executed bc it is now a market order
Use to protect a profit or prevent losses.
Think in terms of closing a position:
Buy stop- used as a hedge for short stock (cut your losses if the price to buy back is getting too high)
Sell stop- use as a hedge for long stock (cut your losses if your stock starts to fall & lose too much value)
Gap risk- Actual execution price (best bid if selling, best offer if buying) may be worse than specified stop price.
But you said do it no matter what.
Remember:
SLoBS over
BLiSS
Buy stop used by technical traders who track support and resistance. Buy stop placed just ABOVE resistance
Believe if it breaks through resistance, it will continue to move upward rapidly
Sell stop placed just BELOW support by technicians to short stock before it develops downward momentum
Stop limit order
If market price hits a figure I designate (the “trigger”), it becomes a limit order.
Do the deal ONLY IF you can get the price I want “or better”. If not? Doesn’t get executed.
Take profit (prevent losses) vs. limit losses (stop, stop- loss). Better for beginner investors to avoid mistakes.
Market on close order
Order is held & executed near end of trading hours.
As close to closing price as possible
Stop order and limit order together. Why?
Can place both to create a bubble. Ex: Long stock at $50
Sell stop at $45 (get out!!)
Sell limit at $55 (if I can get $55 or better, let’s sell for a profit)
SLoBS over
BLiSS
DNR
Orders placed above market value are Sell Limit (SL) and Buy Stop (BS). Executed if market goes up.
*Orders of any kind placed above market are NOT adjusted on ex- dividend date if dividend declared.
Orders placed below market price are Buy Limit (BL) and Sell Stop (SS). Executed if market price drops. Automatically adjusted down on ex- dividend date if a dividend is declared (bc stock price will drop by dividend amount). This prevents dividend from activating the “or better” search or triggering the orders.
Do NOT Reduce (DNR)- Investor doesn’t want order adjusted in case of dividend. OK if this causes order to be executed.
Violations:
Interpositioning
Order splitting/trade shredding
Churning
Principal & agent roles
Interpositioning- adding an extra broker dealer as principal when there is no benefit to customer (extra fees)
Order splitting/ trade shredding- chopping up order into many small orders for purpose of collecting more feed.
(You CAN break a large order into smaller orders if it achieves best execution for customer)
Churning- excessive trading to grab more fees
Principal & agent- not permitted to act as both in a single transaction. Not allowed to collect both (D/P= markup/markdown) (B/A= commission)
Also:
Pmt by firm to influence mkt price
Coordination & intimidation
Pmts for market making
Front running- rep becomes aware of large order (“block trade”- typically 10k shares+). Trades on his own account first, hoping the large order will drive pricing for his order.
Ex: Buy before block trade buy drives up the price. Sell before block trade sell drives down the price.
Trading ahead of customers (placing your own trading interest ahead of client’s- unless corrected immediately- within 60 sec- so customer doesn’t lose)
Trading ahead of research reports
Pump & dump- hyping a company or stock to inflate the price. Then sell for a profit.
Marking the open/ marking the close- entering buy/sell orders just prior to open or close of trading in an attempt to influence open or close price
Spoofing- entering an order you have no intention of executing at quoted price. Trying to manipulate prices by enticing other participants.
Circulation of rumors- passing false or misleading statements regarding a security
Not held order
Gives broker time & price discretion to seek the best price available
Can be placed as market order or limit order
When? Illiquid stocks, market volatility (after earnings announcement, broker downgrade, macroeconomic release such as jobs report)
Types:
Market not held order- market order that expires at EOD (trading day). Ex: Buy 1000 shares Apple at at best price available before mkt close.
Limit not held order- Order submitted with limit attached (“or better).Broker has discretion in executing even if market trades at limit price.
Ex: Buy 1000 Apple at $200 (buy limit- doesn’t want to pay more than $200).
If price is $200 but broker thinks price is too high, he can elect not to fill the order.
**Broker is not liable for losses. Investor cannot dispute the trade if all regs followed.
*This is not a discretionary order (3 As= asset, amount, action)
Publication of transactions and quotations
Equities= report tsxn within 10 seconds (to appropriate facility)
Municipal securities = within 15 minutes (to RTRS- real time reporting system)
Arbitrage
When an investor takes advantage of a temporary price disparity.
Ex: stock priced differently on 2 exchanges. Buy cheap on one exchange, then sell for profit on the other.
Block trade
Trade of 10,000+ units
Front running is a violation- trading ahead, with knowledge this is coming and will influence prices
AON
IOC
FOK
All or none. Must fill all shares or cancel the whole thing
multiple attempts allowed
Immediate or cancel- IMMEDIATELY fill as many shares as you can, canceling the others.
Only one shot.
Fill or kill- fill all shares IMMEDIATELY or cancel the whole thing.
One shot.
Which investment company products cannot be bought/sold with limit orders or stop orders?
Anything not negotiable. Mutual funds and UITs are redeemable with issuer only.
Closed end funds and ETFs are exchange traded, so these orders can be used.
Customer statements
When and what’s reported
Quarterly- no activity
Monthly- activity
Monthly- penny stocks
Includes-
-Activity
-Cash balances/ $$ owed
-long/short positions -at MV or, if illiquid like DPP or unlisted REIT, estimated value*
*If ESTIMATED value provided on statement re DPP or unlisted REIT,
disclosure required stating:
-not listed on exchanges
-illiquid
note, but not likely to be on exam- Estimate us. based on either net investment (use prospectus info- offering %) or appraised value
Transfer from one firm to another
Following a RR after job change
Customer sends signed TIF (tsf initiation form) to receiving firm.
Receiving firm sends TIF to ACATS immediately.
-Carrying firm gets form.
disclosure required if customer following a RR within 3 mo of job change
-1 bz day validate securities
-3 bz days after validation completes the tsf.
ACATS total? 6bz days (unless retirement & receiving acc not set up yet)
Disclosure in first 3mo-
Contact prior to tsf request?
Written, electronic. Oral, must provide written/ elec within 3 bz days
First Contact is tsf request?
Disclosure sent with tsf approval docs
Disclosure-
RR may have conflict of interest, tsf of acc may not be in customer best interest
Death of account holder
Individual, TIC, Partnership, JTWROS
Cx open orders
Freeze account, mark deceased
Wait for executor docs & instructions
Ends: POA, discretionary authority
Docs needed from executor:
-Death certificate
-Letters testamentary/ short cert
-Inheritance tax waiver (says no tax due or taxes were already paid)
TIC?- FREEZE, no new orders until docs presented
May also need affidavit of domicile (which states rules will apply to the decedent’s estate)
Partnership?
Amended Partnership agreement
(Written authorization of rem partners before executing further orders)
* * * * * *
JTWROS?
Only need death certificate, acc not frozen bc survivor is already the documented owner
MOO order aka “at the open”
MOC order
NH order
Proceeds transaction
Alternative aka OCO
MOO- market on open
Market order
Fills at market open
MOC- market on close
Market order
Fills at market close
NH- not held order
Trade request w/o price and/or time specifications
must be day orders or require POA
Floor brokers determine best price or time
Proceeds tsxn- sell a security and use proceeds to buy another security
OCO- enter two orders (two alternatives) such as SL & SS. If one is executed, the other is immediately canceled one cancels the other
Trade errors
If RR orders wrong security (error on firm’s side), firm is responsible to fix trade error. Wrong security is placed in firm’s error account
Firm must acquire the right security & sell to investor at the price they would have gotten if trade placed correctly (regardless of cost)
Riskless transaction
Simultaneous transaction
Riskless- A type of principal transaction.
Buy order received from customer.
Firm doesn’t own the security, but goes to market & acquires so they can immediately sell to customer.
(Less risk to firm= lower fees/markup charged to customer)
Simultaneous- firm is agent, buying or selling on behalf of customer & charging commission
Order adjustments with dividends
Cash dividends
Stock Dividends or stock splits
Cash- only orders placed below mkt are automatically reduced by Cash dividend amount (on ex-date)
BLISS
All orders are adjusted for stock dividends & forward stock splits
For reverse stock splits, all open orders are canceled
Orders not accepted on NYSE & Nasdaq equity markets
-GTC
-Stop; stop- limit
-AON
-FOK
BD can accept if they want- just have to manually monitor status of entered on an exchange that doesn’t accept them
DMM on NYSE- can accept limit & stop orders as an agent/broker & execute as conditions permit
Always acceptable?
-Day
-Market
-Limit
-IOC
OATS=
Equities traded on Nasdaq reporting to FINRA
TRACE=
OTC reporting of corporate & government AGENCY bonds to FINRA
dark pools
Order audit trail system- reports are made on an order by order basis to FINRA
Trade reporting & compliance engine- reporting ONLY
-Both sides report
-No later than 15 minutes after execution
-date, time, quantity, price, yield, does price reflect a commission
excluded from TRACE
-Foreign government debt
-Money market instruments
-Debt securities not eligible for Depositary Trust (banned from e-deposit to DTC)
Dark pools- liquidity & trade volume not transparent. Large block orders without affecting public quotes or price
p. 458
Note: equities trades are reported within 10 seconds.
Listed securities are eligible for OTC trading as ling as the trades are reported within 90 seconds.
MSRB requires reporting within 15 minutes of execution.
TRFs=
Listed stocks trading OTC reporting to FINRA
Report on TRFs- trade reporting facilities
9a-4pET
What is reported?
Trades by FINRA members
-OTC equity securities
-Restricted equities securities re: 144A QIB, including unlisted DPP& REIT
Municipal bond reporting to MSRB
EMMA-
Presented for retail, nonprofessional investors
Free.
OS (official statements) for new issue Municipal bonds, 529 plans, etc.
Ratings & prices
RTRS
maintains audit trail, tsxn data & related info to enhance surveillance capabilities
Firm must submit timely & accurate trade data- data captured and made available to mktplace within 15 minutes of trade
Gray market
Unauthorized but legal trading
Not traded on any OTC quoting mktplaces
Not quoted on any other US quotation medium
Why? Lack of investor interest, available company info, or regulatory compliance
UPC (Uniform practice code) for OTC transactions that are not exempt from ‘34
Deals with delivery and payment of securities tsxns
DELIVERY
At least T+3 =seller’s option
T+2= Corp bonds, Muni bonds, gov’t agency securities, equities (clearinghouses)
T+1 =Options trades, index options exercise
T+1= Treasuries (Federal funds)
T= money market /cash
reg T 2bd after regular way settlement
When-issued (new muni)- initial trade confirmation missing SAT
DK notice interleaved trades- one side doesn’t recognize the trade (wrong acc#) or disagrees with terms (# shares or price is wrong)
Due bills trade before ex-date but mishandling delays settlement & dividend goes to seller in error.
Buyer’s firm sends due bill to seller’s firm telling them to send over the dividend
good deliverable form uniform delivery ticket in FINRA member to FINRA member tsxns
overdelivery & underdelivery Customer presents certificate fot more or less than the exact number of shares or bonds sold
Partial delivery permitted only if the amount remaining to be delivered is not an odd lot
good delivery clearing rule (100 share uniform units) round lots are good delivery as long as they are in 100s or multiples of 100.
*members can deliver odd lots ONLY if they add up to 100 (a round lot)
*build “stacks of 100”, then only one true odd lot if you have can’t make a final “stack” (ex 470 shares)
good delivery for bonds
Corporate & muni bonds
coupon or bearer bonds deliver in denomination of $1000 or $5000
Coupons missing? Not good delivery
fully registered bonds deliver in multiples of $1000, but not exceeding $100,000
Seller’s option contracts
Buyer’s option contracts
Used when seller can’t deliver physical securities in time for regular way settlement.
Contract = lock in selling price, then settle trade as specified in the contract.
Settle early? *If buyer is giveone day written notice, can be settled anywhere from T+3 through the contract date.
Buyer’s OC- buyer specifies when the settlement will take place
UPC (continued)
Delivery and payment
Assignment registered/ listed owner(s) must assign via endorsement. Either sign sig line on back of certificate or on stock or bond power of substitution, aka security power
One stock or bond power for any # of certs of the SAME security
Stock or bond power
Usually attach signed powers to unsigned certificates for processing.
alteration
Alteration or correction to Assignment? Full explanation mat be attached, signed by person or firm who made the change
Signature guarantee
Needed on certificates or stock/ bond power
Signature requirements
Signature must exactly match the name registered/ on the certificate.
Only two acceptable abbreviations:
Co. for company, & for and
Legal transfer items
Not individual or joint ownership? Supporting guarantees or docs needed.
Ex: sole property or partnership: guarantee by BD.
Corporate registration: Corp resolution
Fiduciary: certified copy of trust agreement or court appointment
invalid Signatures
Firm is liable
(Minor’s signature= invalid, forgery of decedent etc).
Death? Executor must endorse cert or stock power and transfer to the name of the estate before securities can be sold
good condition of security
Mutilated, poss counterfeit? Authentication required before tsf agent can accept. If Tsf agent doubts authenticity, seller must provide surety bond ( insurance protecting tsf agent from claims)
UPC (continued again)
CUSIP
A separate CUSIP # is assigned to each of the securities
Legal opinion
EITHER stamped/ traded ex-legal OR legal opinion printed on or attached to bond
fail to deliver
Seller doesn’t make good delivery on settlement date.
No delivery? No $$.
If selling customer doesn’t deliver, firm representing them must buy- in the securities after 10 bz days from settlement. Firm can charge seller for any losses due to change in market.
Reclamation
Buying BD discovers certificates were not in good deliverable form, return to selling broker with uniform Reclamation foemrm
no Reclamation for:
-bond as part of “In- whole call”
-Issuer goes into default after trade date
Firm quote
Market maker ready to transact at least one unit (100 shares stock or 5 bonds)
Types of quotes
P. 131 & 415
Firm/ bona fide
Out-firm/ holding a quote
Subject* estimate, needs confirmation “last time I checked”
Workable indication*- bid at which a dealer would purchase from another dealer
Workout*- special handling needed
Nominal*- thinly traded bonds (especially muni). An “idea of the mkt quote”, can revise
Market wide circuit breaker rules
Who initiates the halt?
Exchanges
OTC
What can be done during a halt?
Protect against rapid uncontrolled drops in the market.
If S&P 500 declines, halt is triggered
Level 1- 7% decline
15 minute halt before 3:25pm
Max 1 per day
Level 2- 13% decline
15 minute if before 3:25pm
Max 1 per day
Level 3- 20% decline
Any time
Halt for remainder of trading day
Exchanges- SEC or exchange
OTC- FINRA or trading venue
During a halt, customer can cx open orders
DVP and RVP
If delivery of security is delayed because of mechanics* of tsxn, BD has up to 35 calendar days to obtain pmt
*NOT bc customer wasn’t able or willing to pay
