FC Chapter 11 Flashcards
If the highest bid equals the lowest ask, the market is __________.
If the highest bid equals the lowest ask, the market is locked.
ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 14.90 - 15.25?
Yes. The market maker would be narrowing the spread to 15.15 - 15.25.
What are some valid reasons for a Nasdaq market maker to obtain an excused withdrawal status?
Regulatory issues, religious holidays, vacations, issues beyond control, involuntary termination of clearing arrangement
If the S&P 500 falls by 20% from the previous day’s close, trading halts for ________________________.
If the S&P 500 falls by 20% from the previous day’s close, trading halts for the remainder of the day.
Ms. Gray places an order to buy 1,000 shares of ABC. What must the BD obtain to fill her order on a net basis capacity?
Ms. Gray’s written consent must be obtained prior to executing the trade.
True or False: Some transactions may justify a markup higher than 5%, while for others, 5% may be too high.
True
What are the three orders that are reduced on the ex-dividend date?
Buy Limits, Sell Stops, and Sell Stop Limits (unless marked DNR)
True or False: To be exempt from the debt markup policy, municipal bond trades must involve only investment-grade debt.
False. The municipal bond trades may include both investment and non-investment-grade debt.
When is a firm generally prohibited from entering proprietary orders?
If the firm knows of an unexecuted client order on the same side of the market that may be executed at the same price
True or False: Proceeds transactions are subject to the 5% Markup Policy.
True
A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
An MM withdrawing its quote for legal or regulatory reasons will be excused for up to ____ days.
An MM withdrawing its quote for legal or regulatory reasons will be excused for up to 60 days.
If a trading halt is in effect, what may a BD do if it receives an unsolicited client order to sell 100 shares?
Nothing, since no transactions may be executed during a trading halt.
What is the penalty if a CQS market maker (third market) has an unexcused withdrawal from publishing a quote?
One business day in that stock
_____________________________ routes orders directly to the DMMs on the NYSE floor.
The Super Display Book System routes orders directly to the DMMs on the NYSE floor.
True or False: After completing a 20-business-day suspension as a MM, a firm may immediately begin quoting the stock.
False. The firm must reapply and, once its application is approved, it may begin quoting on the same day.
A short interest report must be filed with FINRA within ____ business days after it is compiled.
A short interest report must be filed with FINRA within two business days after it is compiled.
What are some of the factors to be considered when determining the markup on a transaction?
The security involved, its availability, its price, the total money involved, and the pattern of markups
What is the penalty for a voluntary withdrawal as a Nasdaq market maker?
A 20-business-day suspension from quoting that security
Trades involving U.S. government securities, effected by any type of client, are _______ from the debt markup policy.
Trades involving U.S. government securities, effected by any type of client, are exempt from the debt markup policy.
As used in the debt markup policy provisions, define prevailing market (contemporaneous cost).
When a trade involving the same security has occurred at a time close to the dealer’s trade
True or False: Since the two legs of a net basis trade have different prices, both sides must be reported as principal.
True
In CQS, what is the penalty if a market maker fails to provide timely quotes for a security?
A one-business-day suspension from market making in that security
Prior to executing each net basis trade for a noninstitutional client, what must be obtained?
Written consent on an order-by-order basis
True or False: A quote on an automated market may NOT lock or cross a quote on another automated market.
True. Crossing or locking a market is prohibited.
What happens to a customer’s order if there is a reverse split in the stock?
Orders are cancelled if there is a reverse split.
What concern would a firm have if a trader repeatedly requests that the firm’s internal controls be relaxed?
That the trader is engaging in rogue trading
Under NYSE Rule 5320, to trade along with a client, a BD’s order must meet one of three conditions. List the conditions.
To liquidate a proprietary position, to create/modify a bona fide hedge, to engage in arbitrage or risk arbitrage
Define a riskless principal transaction.
One in which a BD buys or sells stock on a principal basis and fills an existing client order at the same price
FINRA’s 5% policy addresses transactions executed in the ___________ market.
FINRA’s 5% policy addresses transactions executed in the secondary market.
Unauthorized trading by a registered person is also referred to as ______ trading.
Unauthorized trading by a registered person is also referred to as rogue trading.
True or False: A riskless or simultaneous transaction is subject to the 5% Policy.
True
Where would a firm disclose whether an order was solicited or unsolicited?
On the order ticket (not the confirmation)
True or False: Under Limit Up-Limit Down rules, a trading pause may occur if a security enters a straddle state.
True. The primary listing market may declare a trading pause when the security is in a straddle state.
True or False: A Nasdaq market maker can get an excused withdrawal due to excessive volatility in a stock.
False
On the floor of the exchange, the _____ maintains a fair and orderly market.
On the floor of the exchange, the DMM maintains a fair and orderly market.
True or False: To effect net basis trades for institutional clients, a BD may depend on a negative consent letter.
True
If contemporaneous cost is not used to determine a debt security’s markup, what method would be the least important?
An economic model developed by regulators of the bond market (this is a last resort method)
If a new market maker enters a quote with the bid equaling the lowest asked price, the market is ________.
If a new market maker enters a quote with the bid equaling the lowest asked price, the market is locked.
For LULD rules, if the NBB is in the upper band or the NBO is in the lower band, the market is in a _____ state.
For LULD rules, if the NBB is in the upper band or the NBO is in the lower band, the market is in a limit state.
True or False: Trades in exempt securities are exempt from the debt markup policy only if the client is an institution.
False. Trades involving exempt securities (e.g., Treasuries) are exempt from the policy for any type of client.
True or False: The 5% Policy is based on the dealer’s inventory cost on a security.
False, it is generally based on the inside market price.
A client sells $10,000 of MBRT and uses the proceeds to buy $10,000 of TNLN and is charged $850. What is the markup?
Proceeds transactions are treated as single trades; therefore, the markup is 8.5% ($850 ÷ $10,000 = 8.5%).
Do-not-display requests should be ___________ and the request may be on a _______________ basis.
Do-not-display requests should be documented and the request may be on a trade-by-trade basis.
An MM may withdraw its quote for up to _____ business days for issues beyond its control (e.g., a system outage).
An MM may withdraw its quote for up to five business days for issues beyond its control (e.g., a system outage).
Bill directs his BD to sell his $10,000 of ABC and use the proceeds to buy $10,000 of XYZ. What type of trade is this?
A proceeds transaction
Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?
Both
What is the penalty if a Nasdaq market maker has an unexcused withdrawal from publishing a quote?
20 business days in that stock
True or False: A memorandum of each trade must show the terms of the transaction along with any modifications.
True. Trade tickets will also show the account name or number and the person accepting the order.
True or False: Withdrawal as a Nasdaq market maker due to insufficient staff would be a violation.
True. Withdrawal due to insufficient staff, volatility, or increased trading volume would be unexcused.
True or False: For principal trades, commissions must be disclosed.
False. For principal trades, a net price (inclusive of any markup) is shown.
True or False: National best offers below the Limit Up-Limit Down upper price band are non-executable.
False. An NBO below the Limit Up-Limit Down upper price band is executable.
True or False: Firms are prohibited from acquiring stock at the same price as the client.
False. Under NYSE Rule 5320, with client consent, firms may be permitted to trade along with their clients.
True or False: Executing trades at prices that cannot be explained by market forces is prohibited.
True
In a proceeds transaction, on how many trades is the markup based?
Only one trade (as if the trade was done for cash)
True or False: An order ticket will identify the broker on the other side of the trade (contra broker).
False
ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 15.40 - 15.75?
No. The high bid (15.40) and the low offer (15.40) would be the same price, resulting in a locked market.
____________________ is the insertion of a third party between a customer and the best market price.
Interpositioning is the insertion of a third party between a customer and the best market price.
What is a firm’s DEA?
The SRO to whom a firm must report
For agency trades, ____________ must be disclosed.
For agency trades, commissions must be disclosed.
True or False: For a bond trade, the order ticket will include accrued interest information.
False. Accrued interest is disclosed on the customer confirmation.
According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for ______ minutes.
According to NYSE Rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for 15 minutes.
__________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
True or False: Having unrealized profits or losses on unsettled trades may indicate rogue trading.
True
Refusing to trade with another BD that engages in competitive activities is a violation of what FINRA/Nasdaq provision?
FINRA/Nasdaq’s Anti-Intimidation and Coordination Interpretation
A Nasdaq MM withdraws its quote due to becoming a distribution participant. Would this withdrawal be unexcused?
No. This is an excused withdrawal due to Reg. M participation requirements.
According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for ____ minutes.
According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for 15 minutes.
Designated market maker (DMM) is synonymous with what term?
Specialist
Where would information regarding an order’s time of entry and execution (time stamps) be found?
On the order ticket
True or False: Accumulating an inventory position based on anticipation of a research report is a prohibited practice.
True
The Limit Up-Limit Down (LULD) rules address sudden price movements in ____ stocks.
The Limit Up-Limit Down (LULD) rules address sudden price movements in NMS stocks.
May the Designated Market Maker (Specialist) accept a not held order?
No
A markup is generally based on the _______ market, but not the _____________.
A markup is generally based on the inside market, but not the dealer’s cost.
If not using contemporaneous cost, put in order the three factors a BD may use to determine fair value on a bond trade?
Recent interdealer quotes, recent prices of trades between dealers, and prices of equivalent securities
A U.S. BD trades a stock listed in the U.S. and on a foreign exchange. If U.S. trading is halted, what must the BD do?
Cease quoting and trading the stock in both U.S. and foreign markets
Define net basis trade.
One in which a BD buys or sells stock on a principal basis and fills an existing client order at a different price
Identify the acronym: LULD
Limit UP-Limit Down
True or False: National best bids below the Limit Up-Limit Down lower price band are non-executable.
True. The stock’s Securities Information Processor (SIP) will identify the NBB as non-executable.
According to NYSE Rule 5320, trading along with a client is not permitted when the firm is _________ its own position.
According to NYSE Rule 5320, trading along with a client is not permitted when the firm is creating its own position
For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s _________ price.
For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s reference price.
To prevent rogue trading, a BD may limit an employee’s access to only trading systems that are ____________ to his job.
To prevent rogue trading, a BD may limit an employee’s access to only trading systems that are appropriate to his job.
What is the first priority used by a dealer when determining the markup on debt securities?
The contemporaneous cost of the dealer
If the highest bid is above the lowest ask, the market is __________.
If the highest bid is above the lowest ask, the market is crossed.
List some indicators that a BD’s associated persons may be engaging in rogue trading.
Trading without approval in a product outside their expertise or an unusual pattern of cancelled trades by traders
A ________ state occurs if the NBB is below the lower band or the NBO is above the upper band, but not in a limit state.
A straddle state occurs if the NBB is below the lower band or the NBO is above the upper band, but not in a limit state.
The 5% policy is a __________, not a _____ for dealing with commissions and markups.
The 5% policy is a guideline, not a rule for dealing with commissions and markups.
If a company executes a reverse stock split, what happens to all open orders?
The open orders will be cancelled.
What transactions are exempt from the debt markup policy?
Those involving municipals (any grade) or other exempt securities (Treasuries), or QIBs buying non-investment-grade debt
True or False: If a trading halt is initiated for an OTC equity, the trading or publishing of a quote is prohibited.
True
True or False: A client employing a buy-and-hold strategy is most suitable for a wrap account.
False. Wrap accounts are suitable for clients who execute several trades a week.
Is it a violation for a BD to buy ABC calls for itself before executing a buy order it is holding from an institution?
Yes. The violation is referred to as front-running.
What trades would be covered by the 5% policy?
Secondary market trades of stocks, corporate bonds, and Treasuries
Is it possible for a quote on a manual market to lock or cross a quote found on an automated market?
Yes, but crossing or locking a market is prohibited.
True or False: Once a firm files an application for market making, it may immediately begin to quote specific stocks.
False. After filing an application for market making, the firm must be notified by FINRA of its effectiveness.
A company makes a payment to a market-making firm as a thank you for publishing quotes. Is the payment permitted?
No. Making payments to a market maker creates a conflict of interest.
What is interpositioning?
The placement of another BD between a customer and the best market
Under LULD rules, failure to exit the limit state within 15 seconds results in a ____ minute trading pause.
Under LULD rules, failure to exit the limit state within 15 seconds results in a five minute trading pause.
What is exempt from the 5% policy?
Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds
True or False: An order ticket will indicate if an order was discretionary, solicited, or unsolicited.
True
Is a market maker permitted to unilaterally set its own bid and ask, dealer spread, quote increment, or share quantity?
Yes. These activities are not in violation of FINRA or Nasdaq rules.
What may be implemented by a BD to prevent rogue trading?
Mandatory vacations for a minimum time for traders or using multiple passwords to gain access to certain systems
In absence of a prevailing market price, ____________________ is used in determining the markup on corporate bonds.
In absence of a prevailing market price, contemporaneous cost is used in determining the markup on corporate bonds.
Sales of new issues and mutual funds and trades between members are _______ from the 5% policy.
Sales of new issues and mutual funds and trades between members are exempt from the 5% policy.
For debt transactions, how is markup generally determined?
It is based on the dealer’s contemporaneous cost.
True or False: Traders exceeding the daily parameters set for the value or number of trades may indicate rogue trading.
True
Define a proceeds transaction.
A client directs her BD to liquidate securities and use the proceeds to buy other securities.
Executing a series of trades at the end of the day to manipulate the price of a security is called ________________.
Executing a series of trades at the end of the day to manipulate the price of a security is called marking-the-close.
True or False: After an excused withdrawal, an MM must reapply to Nasdaq Market Operations before resuming its quote.
True. A market maker must reapply before resuming its quote after either excused or unexcused (voluntary) withdrawals.
True or False: NYSE members may act as agent for both the buyer and seller in a transaction.
True. Acting as a dual agent in a cross transaction is acceptable.
If a new market maker enters a quote with the asked price lower than the highest bid, the market is _________.
If a new market maker enters a quote with the asked price lower than the highest bid, the market is crossed.
True or False: Whether the firm will profit on a transaction is a key consideration when determining its markup.
False
For what type of firm would employee vacations qualify as an excused withdrawal for market-making purposes?
A small firm with three or fewer Level III terminals
Name 3 factors that may be used when determining the markup of a security under the 5% Policy.
1) Type of security, 2) Price of security, 3) Availability of the security in the market
A firm splits a 1,000-share order into ten 100-share orders to increase its rebates. What is this called?
Trade shredding (a violation)
ABC’s inside market is 15.15 - 15.40. May a new market maker enter a quote of: 14.40 - 14.90?
No. The 14.90 offer would cross the high bid of 15.15.
May a BD delay the reporting of trades based on requests made by another market maker?
No. The Department of Justice considers this a prohibited practice.
Trading will exit the limit state if all limit state quotations are executed or cancelled within ___ seconds.
Trading will exit the limit state if all limit state quotations are executed or cancelled within 15 seconds.
A BD receives a large buy order from a client. When may the BD execute a trade for the same stock in its own account?
After the client’s trade is reported on the Tape
According to the Department of Justice, what activities of BDs would not be considered collusive?
Executing some trades outside of the inside market or executing large block trades outside of normal hours
A BD receives a client order to sell 20,000 ABC at $38. May a trader buy 10,000 ABC at $38 for the BD’s account?
Yes. Since the proprietary trader is on the opposite side of the market, no prohibition applies.
What must decline by a specific percentage to trigger a trading halt?
The S&P 500 Index
True or False: An order ticket will indicate the RR responsible for the account and a branch identifier.
True
Name a type of transaction that is exempt from FINRA’s Debt Markup Policy.
Transactions in municipal securities
A firm buys 1,000 shares of ABC at $20 as a principal and sells the shares to a client at $20.50. What is this trade?
Since the price is the different, it is a net basis trade (the markup is not required to be disclosed).
True or False: A 200-share trade of MSFT on Nasdaq is subject to the 5% policy.
True, the 5% Policy covers trades executed in the secondary market.
Name the two regulators that have the authority to halt trading in a Nasdaq security.
The SEC and FINRA
A BD buys a security to fill an existing client order. This is called a ___________________________ transaction.
A BD buys a security to fill an existing client order. This is called a riskless/simultaneous principal transaction.
Define the contemporaneous cost (used when no competitive market exists).
The price one BD will pay another BD for a security at the time of a client’s trade
True or False: A 500-share trade of an NYSE stock executed in the OTC market is subject to the 5% Policy.
True, third market trades (exchange-listed securities traded OTC) are subject to the 5% Policy.
To obtain consent for effecting net basis trades for noninstitutional clients, is a negative consent letter allowed?
No. Negative consent letters are only allowed for institutional clients. Noninstitutional clients must provide written consent.
True or False: If XYXY is currently under a trading halt, a firm may only execute institutional orders for XYXY.
False. During a halt, no orders may be executed.
What are the different methods of obtaining consent from an institution for executing net basis trades?
BDs may obtain oral or written consent prior to each net basis trade, or depend on a negative consent letter.
Define trade shredding.
Splitting clients’ securities orders into multiple smaller orders to maximize payments or rebates to the member
True or False: Regardless of the trading system used, if a regulatory halt/suspension is imposed, trading must cease.
True
A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
True or False: Rogue trading may result in significant financial benefits for a BD.
False. Rogue trading may result in large financial losses for a BD.
_____________ other market makers from narrowing the spread is a prohibited practice.
Discouraging other market makers from narrowing the spread is a prohibited practice.
While holding a large block order to buy from a client, what action would be prohibited for the market maker?
Executing an order for its own account in an option on the security (front-running violation)
True or False: The capacity in which the firm is acting in a transaction is found on the order ticket.
False. Firm capacity is found on the confirmation.
What are some of the different functions of Designated Market Makers?
Maintaining liquidity and buying and selling from their own account
True or False: Crossing or locking a market is an accepted practice employed by market makers.
False. Crossing or locking a market is prohibited.
When a firm dominates or controls the market for a security, on what is a markup based?
The firm’s contemporaneous cost
A firm buys 1,000 shares of ABC at $20 as a principal and sells the shares to a client at $20. What is this trade?
Since the price is the same, it is a riskless principal trade (the markup is required to be disclosed).
What events may cause the prevailing market for a debt security to be different than contemporaneous cost?
A change in issuer’s credit rating, a change in market interest rates, or significant news reports about the issuer
Give some examples of BD practices that are prohibited according to the Department of Justice.
Sharing client order information, selectively backing away from quotes, coordinating prices with other market makers
