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Series 24 Group Share > FC Chapter 10 > Flashcards

FC Chapter 10 Flashcards

1
Q

True or False: A firm may not report a trade without knowing, or having reason to believe, that it actually occurred.

A

True. A trade may not be reported based on a rumor.

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2
Q

Orders to sell all exchange-listed and over-the-counter equities must be marked _____ or ______.

A

Orders to sell all exchange-listed and over-the-counter equities must be marked long or short.

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3
Q

In a prime-brokerage arrangement, who is responsible for making affirmative determination under Regulation SHO?

A

The executing broker

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4
Q

True or False: Market makers may accept payment from issuers for providing market-making services.

A

False

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5
Q

What is the purpose of Regulation SHO?

A

To regulate the practice of selling short

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6
Q

Fails-to-deliver in threshold securities that have existed for ___________________ settlement days must be closed-out.

A

Fails-to-deliver in threshold securities that have existed for 13 consecutive settlement days must be closed-out.

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7
Q

What information must be included in a BD’s quarterly routing report?

A

The security (NYSE, AMEX, Nasdaq, or option) and the market center to which the orders are routed

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8
Q

A BD holding a client’s buy limit order is required to fill the client’s order after doing what for its own account?

A

Buying at the same or lower price for the firm’s account

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9
Q

Explain the Trade Ahead Exception to the Firm Quote Rule which allows a market maker (MM) to not honor presented orders.

A

An MM executes an order either before or at the time of presentation and revises its quote immediately upon completion

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10
Q

True or False: A market maker publishing a firm quote is obligated to honor the price and the number of shares quoted?

A

True. A BD providing a firm quote is obligated to honor both the price and size displayed.

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11
Q

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.583?

A

No. If NMS stock is priced above $1.00, it may NOT be quoted in increments less than $0.01.

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12
Q

True or False: Non-displayed orders are NOT subject to price protection rules.

A

False

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13
Q

What rules must DMMs follow when trading for their own account?

A

DMMs may compete as market participants. The specialist, which preceded DMMs, could not compete.

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14
Q

True or False: Under NMS Rule 611, the Order Protection Rule, a manual quotation on the NYSE floor is protected.

A

False. Protected quotes are those that may be immediately accessed through an automated system.

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15
Q

True or False: The number of market makers for a security is a key consideration when determining best execution.

A

False

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16
Q

Sell order tickets are marked long when clients have unconditional contracts to buy, but the trades have not ________.

A

Sell order tickets are marked long when clients have unconditional contracts to buy, but the trades have not settled.

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17
Q

Market centers are required to create ________ reports disclosing the measures of the quality of order execution.

A

Market centers are required to create monthly reports disclosing the measures of the quality of order execution.

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18
Q

A client who is long 500 shares of XYZ and short 600 shares of XYZ is net short ____ shares.

A

A client who is long 500 shares of XYZ and short 600 shares of XYZ is net short 100 shares.

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19
Q

True or False: A sell order ticket may be marked long if the client or his agent has title to the security.

A

True. A BD must be in possession of a security or have reason to believe the client is long and will deliver promptly.

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20
Q

True or False: Do-not-display requests may NOT be entered by clients.

A

False

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21
Q

A BD sends its client orders to an exchange for execution and is rebated for executed trades. What is this practice?

A

Payment-for-order-flow

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22
Q

A market maker quotes a stock at 14.50 - 15.00, 3 x 5. At what price would a customer’s market order to sell be filled?

A

Customer market orders to sell are filled at the bid price of 14.50.

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23
Q

True or False: A market maker must immediately display any client order that improves its quote.

A

True

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24
Q

True or False: SEC Rule 606 requires a BD’s quarterly order flow report to include Pink Sheets and OTCBB equities.

A

False. Pink Sheets and OTC equities are not included.

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25
Q

A market maker quotes a stock at 14.50 - 15.00, 3 x 5. At what price would a customer’s market order to buy be filled?

A

Customer market orders to buy are filled at the ask price of 15.00.

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26
Q

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it receives a client order to buy 300 at 21.10?

A

If the market maker’s quote is improved, it must display the client’s interest. Its quote is now 21.10 - 21.35, 3 x 10.

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27
Q

A firm’s trading desk may buy at a price that would fill a client order of another desk if _____________________ exist.

A

A firm’s trading desk may buy at a price that would fill a client order of another desk if information barriers exist.

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28
Q

In the Manning Rule, is an exception available for the following client order: Buy 10,000 shares for $12.50 per share?

A

Yes. Trade exceptions may apply for large orders (10,000 shares or more and a dollar value of at least $100,000).

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29
Q

What must a firm do if it holds Jim’s order and buys for its own account at a price equal to or better than Jim’s?

A

Fill the client’s order at the same price that it received

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30
Q

Due to staff shortage, BD 1 gives a client order to BD 2 to execute with extra costs passed to the client. Acceptable?

A

No. This is interpositioning and is not advantageous to the client.

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31
Q

A market maker is quoting ABC at 21.05 - 21.35, 15 x 50. What happens if it accepts a client order to sell 500 at 21.35?

A

If client interest is 10% or less of the market maker’s size (de minimis), no change is made (5,000 x 10% = 500 sh.).

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32
Q

True or False: The Order Protection Rule (NMS Rule 611) only applies during extended trading hours.

A

False. The Order Protection Rule applies during normal trading hours (9:30 a.m. to 4:00 p.m. ET).

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33
Q

What orders are exempt from the Limit Order Protection Rule?

A

Orders from institutional accounts and orders of 10,000 shares or more worth at least $100,000

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34
Q

The inside market for an NMS security is .90 - .95. At what price levels may a BD accept indications of interest?

A

If NMS stock is priced less than $1.00, it may be quoted in increments no less than one hundredth of a cent ($0.0001)

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35
Q

A BD’s trading desk receives a client order to buy an NMS stock at $.956. May the order be accepted?

A

Yes. For NMS stocks that are priced less than $1.00, orders may be accepted at up to four decimal places.

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36
Q

When is a market maker’s application considered effective?

A

When notified by FINRA (NOT Nasdaq)

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37
Q

Without causing a regulatory violation, why may a presented order not be honored by a market maker?

A

Either before or at the time of order presentation, the BD executes an order and will immediately revise its quote.

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38
Q

How often must BDs publish reports summarizing their order routing practices?

A

Quarterly

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39
Q

True or False: Under NMS Rule 610, a market center may charge participants a fee for accessing its quotations.

A

True; however, the fee must be reasonable.

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40
Q

List some of the factors considered when attempting to obtain best execution.

A

Size/type of transaction, number of markets checked, accessibility of quotes, terms/conditions of the order

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41
Q

When is interpositioning acceptable?

A

When the member firm is able to demonstrate that the execution was advantageous to the client

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42
Q

For NMS stocks priced at $1.00 or greater, what access fee may market centers charge market participants?

A

$0.003 per share

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43
Q

How often must market centers publish reports of the efficiency of executions?

A

Monthly

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44
Q

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.65?

A

No, because a bid of $12.65 would cross the inside offer of $12.62.

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45
Q

When does the obligation to comply with the Customer Limit Order Protection Rule apply?

A

During both normal and extended trading hours and when orders are sent to an ECN (or other entity) for execution

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46
Q

For NMS stocks priced at less than $1.00, what access fee may market centers charge market participants?

A

0.3% of the dollar value of the quote

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47
Q

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.58?

A

Yes. The BD’s bid at $12.58 would serve to narrow the spread.

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48
Q

What does the Order Protection Rule (NMS Rule 611) prohibit?

A

A market center’s ability to trade-through the best (protected) quote in an automated market

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49
Q

In order to effect a block at the clean-up price, what is a member firm required to do?

A

It must first trade with the best prices in the display book or from other floor participants.

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50
Q

What steps are required for a firm to obtain an exception from the Customer Limit Order Protection Rule to apply?

A

Before an order is accepted, it must obtain client consent and it must disclose that it may potentially trade ahead.

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51
Q

What are the two ways order tickets can be marked when selling securities?

A

Long (selling shares that are owned) or short (selling stock that is being borrowed)

52
Q

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 500 at 21.35?

A

Assuming the market maker is at the inside, it adds the client’s interest to its displayed size (21.05-21.35, 15 x 15).

53
Q

True or False: Trade confirmations must disclose details of trades effected through a payment-for-order-flow agreement.

A

True

54
Q

True or False: A member firm is NOT required to inform the DMM of its intention to cross a block at a specified price.

A

False. The DMM must be informed by the member firm.

55
Q

What does NYSE Rule 127 regulate?

A

The crossing of a block of stock at a specified price outside its current quotation on the NYSE

56
Q

Related to the Order Protection Rule (NMS Rule 611), what is a protected quote?

A

Any quotation that is immediately accessible through an automated execution system

57
Q

Sally converts her XYZ bonds and enters an order to sell XYZ stock. How would the sell order ticket be marked?

A

Since the tender for conversion has been entered prior to the sale, the order ticket may be marked long.

58
Q

To be considered a threshold security, excessive fails-to-deliver must occur for ____ consecutive settlement days.

A

To be considered a threshold security, excessive fails-to-deliver must occur for 5 consecutive settlement days.

59
Q

True or False: Clients must provide verbal or written consent to a BD concerning payment-for-order-flow arrangements.

A

False. BDs are, however, required to provide disclosure of the arrangement.

60
Q

To comply with the Best Execution Rule, is a BD always required to obtain the best market price available for clients?

A

No. However, BDs are required to use reasonable diligence to obtain the best price possible.

61
Q

When must a BD fill a client’s limit order after executing a trade for its own account at the same or better price?

A

Immediately (within 60 seconds)

62
Q

What does the Best Execution Rule require a member firm to do?

A

Use reasonable diligence to obtain the best price possible for a client

63
Q

Large orders of ________shares or more, or $___________ or more, are exempt from the Limit Order Display Rule.

A

Large orders of 10,000 shares or more, or $200,000 or more, are exempt from the Limit Order Display Rule.

64
Q

To not violate the Firm Quote Rule, when must a market maker have communicated a change to its quote (price or size)?

A

Prior to the presentation of an order

65
Q

True or False: A volume-weighted average price (VWAP) order is usually placed by an institutional investor.

A

True

66
Q

To enable them to compete with market makers, customer limit orders are subject to ________ rules.

A

To enable them to compete with market makers, customer limit orders are subject to display rules.

67
Q

How often are the circuit breakers that are used to determine the triggering of a trading halt reset?

A

Quarterly

68
Q

Describe payment-for-order-flow.

A

A BD practice of providing monetary incentive (cash, rebates, or discounts) for routing orders to a BD or exchange

69
Q

True or False: A request to not display an order must be individually negotiated with the client.

A

True

70
Q

If a BD receives a client order to sell 20,000 BBB at $54, when may its proprietary trader sell BBB at the same price?

A

When the firm implements a system to prevent the misuse of information regarding client orders (information barriers)

71
Q

What are some exemptions to the Limit Order Display Rule?

A

Order immediately executed, order sent to a BD or ECN that complies, block order, or customer requests “do not display”

72
Q

What activities are prohibited for NYSE members on the floor of the exchange?

A

Betting on the direction of the market, buying or selling dividends, buying or selling securities on the close

73
Q

Under the Limit Order Display Rule, how quickly must orders that improves the market maker’s quote be displayed?

A

Immediately, but no later than 30 seconds

74
Q

How is the volume-weighted average price (VWAP) calculated?

A

By totaling the dollar value of each trade (shares x price) divided by total number of shares traded over a given period

75
Q

A client who is long 500 shares of ABC enters a single order to sell 600 shares of ABC. Is this a short sale?

A

Yes. If entered on one ticket, the client is net short 100 shares.

76
Q

A BD sends an order to Market Center A whose offer is $14.85, while Market Center B’s offer is $14.83. Is this allowed?

A

No. The order should be routed to Market Center B, which is quoting the stock at a superior (lower) price.

77
Q

_________________ means the DMM is guaranteeing a price on a public order for a floor broker.

A

Stopping stock means the DMM is guaranteeing a price on a public order for a floor broker.

78
Q

A market maker is quoting stock at 14.50 - 15.00, 3 x 5. The firm must fill how many shares at the bid price?

A

The market maker is obligated to fill a minimum of 300 shares.

79
Q

May widely circulated, but unsubstantiated, rumors be disseminated in a report created by an analyst?

A

Yes, provided disclosure is made regarding the source of the information and that the rumors are unsubstantiated.

80
Q

Market center reports that identify the percentage of trades receiving price improvement, indicate market ___________.

A

Market center reports that identify the percentage of trades receiving price improvement, indicate market efficiency.

81
Q

What is the violation for a market maker failing to honor its firm quote?

A

Backing away

82
Q

On a quarterly basis, BDs must disclose their routing practices for ______________ orders in NMS securities.

A

On a quarterly basis, BDs must disclose their routing practices for non-directed orders in NMS securities.

83
Q

Under NYSE Rule 127, what constitutes a block transaction?

A

10,000 shares or more, or a trade with a market value of $200,000 or more

84
Q

A BD wants to buy 15,000 sh. at 32.10. Client sell limits at 32.08 and 32.09 are in the DMM’s order book. What happens?

A

The member firm must buy the shares from the clients offering at better prices before completing the block at 32.10.

85
Q

What must exist for the Manning Rule to not apply to other trading desks of a BD?

A

Information barriers

86
Q

What securities are included in monthly market center reports?

A

Nasdaq and exchange securities for which information is sent through an automated quotation system

87
Q

Though acting in good faith, a customer sells securities, but does not deliver. When must the BD close out the trade?

A

All fails-to-deliver must be closed out within 35 calendar days.

88
Q

What is a threshold security?

A

A reporting company’s stock that has substantial fail-to-deliver positions in existence for 5 consecutive business days

89
Q

As defined in the Limit Order Display Rule, what is a block-sized order?

A

An order for at least 10,000 shares and with a value of at least $200,000

90
Q

A client who is long 500 shares of ABC and short 400 shares of ABC is only net long ____ shares.

A

A client who is long 500 shares of ABC and short 400 shares of ABC is only net long 100 shares.

91
Q

For short against the box transactions, the sell order ticket is marked ______.

A

For short against the box transactions, the sell order ticket is marked short.

92
Q

Between 10:00 a.m. and 11:00 a.m., 6,700 shares traded with a total value of $268,536. Calculate the VWAP.

A

$268,536 ÷ 6,700 shares = $40.08

93
Q

To be a threshold security, how many shares must be in a failing position?

A

10,000 shares or more

94
Q

True or False: Market makers are exempt from the borrowing requirement of Regulation SHO.

A

False

95
Q

True or False: Firm at the inside market receives a client limit order equal to the firm’s quote must add to its size.

A

True. It must increase the size of its quote, unless de minimis (order size is 10% or less of MM’s current size).

96
Q

If client consent is obtained, a firm may trade along with a client at the same price with what types of client orders?

A

Orders designated as not-held for institutions or with large orders (10,000 sh. or more with value of at least $100,000)

97
Q

A BD holds a client order to sell 500 shares at $21. What would trigger an obligation to fill the client’s order?

A

The BD selling from its own account at $21 or higher

98
Q

What is calculated between a beginning and ending period, based on an average of trades executed during that period?

A

The volume-weighted average price (VWAP)

99
Q

Where is a BD required to post its order routing information?

A

On its Web site, free of charge and accessible to the public

100
Q

In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?

A

Easy to borrow (called the locate requirement)

101
Q

Describe a non-directed order.

A

An order that does not have a specific market center designated by the client and is chosen by the BD

102
Q

A client with a futures contract has decided to sell stock. When may the sell order ticket be marked long?

A

When, before the sale, the client is notified that the futures contract will be settled resulting in delivery of shares

103
Q

True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.

A

False. She must have EXERCISED the options, rights, or warrants.

104
Q

Market maker’s quote: 17.40-17.45 8 x 7. Will the quote change upon receipt of client order to buy 300 shares at 17.42?

A

Yes, it changes to 17.42 - 17.45 3 x 7. A client’s buy limit order competes with BD bid prices in the market.

105
Q

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than _________ old.

A

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than 24 hours old.

106
Q

When a client designates a specific market center to which her order is routed, it is a _________ order.

A

When a client designates a specific market center to which her order is routed, it is a directed order.

107
Q

True or False: Market makers are prohibited from trading ahead of customer limit orders.

A

True

108
Q

Rather than displaying an order, what alternatives are available to firms?

A

Execute it upon receipt or deliver it to an ECN or another firm that is complying with the Limit Order Display Rule

109
Q

True or False: The Locate Requirement of Regulation SHO applies when a sell order ticket is marked long or short.

A

False. The Locate Requirement only applies when a sell order ticket is marked short.

110
Q

A client who is long ABC call options enters an order to sell 1,000 shares of ABC stock. Is this a short sale?

A

Yes. For the sale to be marked long, the options would need to be exercised prior to the sale of the stock.

111
Q

True or False: Order-routing disclosure requirements apply to all reporting parties.

A

True. Both market makers and order-entry firms must provide disclosures.

112
Q

Who publishes a list of all threshold securities?

A

A self-regulatory organization (SRO)

113
Q

NMS Rule 612 generally prohibits market participants from displaying orders in pricing increments of less than ________.

A

NMS Rule 612 generally prohibits market participants from displaying orders in pricing increments of less than one cent.

114
Q

What step is required if a fail-to-deliver position has been open for 13 consecutive settlement (business) days?

A

Mandatory close-out

115
Q

True or False: Executing a client’s trade outside of the U.S. would be an acceptable use of interpositioning.

A

True

116
Q

Is interpositioning an acceptable practice?

A

No, it is generally prohibited.

117
Q

To mark a sell order ticket long, any options, warrants, or rights owned must have been __________ before the sale.

A

To mark a sell order ticket long, any options, warrants, or rights owned must have been exercised before the sale.

118
Q

To whom and when must the routing firm disclose details of any payment-for-order-flow practices?

A

Clients must be informed in writing at the opening of an account and annually thereafter.

119
Q

Under the Customer Limit Order Protection Rule, what is considered a large order?

A

10,000 shares or more unless the dollar value is less than $100,000

120
Q

True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.

A

False, the convertibles must already have been TENDERED for conversion.

121
Q

To what does the Manning Rule relate?

A

Customer limit order protection

122
Q

A BD holds a client order to buy 500 shares at $15. What would trigger an obligation to fill the client’s order?

A

The BD purchasing for its own account at $15 or lower

123
Q

What does Regulation SHO regulate?

A

Short sales

124
Q

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 700 at 21.30?

A

If the market maker’s quote is improved, it must display the client’s interest. Its quote is now 21.10 - 21.30, 15 x 7.

125
Q

How does NMS Rule 611, the Order Protection Rule, seek to prohibit the trade-through practice?

A

By requiring a market center to route orders to the automated market displaying the best price

126
Q

When is a VWAP order entered?

A

Prior to the determination of the actual price; therefore, the BD guarantees the VWAP as of a certain period.

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