Series 57 Flashcards
Which of the following statements are TRUE regarding limit orders?
I NASDAQ market makers must accept limit orders
II NASDAQ market makers are not required to accept limit orders
III If a limit order is accepted, NASDAQ market makers may impose separate charges for limit order handling
IV If a limit order is accepted, NASDAQ market makers may not impose separate charges for limit order handling
II and III
Under SEC rules, OTC market makers are not required to accept limit orders - they can do so if they wish. Since these orders require special handling, extra charges can be imposed for processing these orders.
What is the settlement date that applies to the exercise of index options?
The business day following the date of exercise
Explanation:
Cash settlement for index options must take place on the business day following the date of exercise.
How many shares constitutes block size for purposes of the rule against displaying customer limit orders on NMS equities?
10,000 shares
Explanation:
Block size for NMS display purposes is at least 10,000 shares and a market value of at least $200,000.
System hours expire time (SHEX) orders
allow the customer to specify the exact time in force. For example, the customer could state “good for an hour,” “good for a week,” or “good for a month.” 10 orders are available for entry and execution anytime the system is open (4:00 am–8:00 pm).
During a limit state for an equity security
Orders can be entered and trades can be executed.
Explanation:
During the 15 second limit state, trading will continue. If the limit state quote persists for 15 seconds, trading will be halted for five minutes. If the limit state quote is executed or cancelled the security will exit the limit state and trading will continue uninterrupted. During a halt under LULD, orders can be entered but trades cannot be executed.
Under Rule 103 of Regulation M, a UAR request to act as a passive market maker is:
I made by the syndicate manager
II made by each syndicate member
III signed by the syndicate manager
IV signed by each syndicate member
I and III
Rule 103 of SEC Regulation M requires that the manager and syndicate members of a secondary offering that happen to be market makers in that issue either resign from market making (they get “excused withdrawal status”) during the 20-day cooling off period; or act solely as passive market makers (their quotes will be identified as those of a passive market maker). FINRA requires that written notice be given on an “UAR” (Underwriting Activity Report) at least 1 business day prior to the start of the 20-day cooling off period. The report is filed by the manager on behalf of the syndicate members. NASDAQ requires that the managing underwriter notify each syndicate member that it has been identified to MarketWatch as a distribution participant, so that its quotes will be automatically withdrawn or identified as passive market maker quotations.
What is the difference between Nasdaq’s rules for clearly erroneous trades and obvious options errors?
The obvious error rule will adjust the price of the trade while the clearly erroneous rule will cancel the trade.
Explanation:
Nasdaq’s rule for clearly erroneous trades in equity securities will lead to the cancellation of a trade if it is outside a certain range from the stock’s reference price. Nasdaq’s obvious error rule for options will result in a trade being adjusted to a designated amount away from its theoretical value, if the price of the trade is a certain range from that value.
Important TRF modifiers
.T
- Timely report executed outside market hours
- Timely reports are with 10 seconds when TRF is open
- Timely reports are by 8:15 the next time TRF is open
.Z
- Late report for a trade within normal market hours
- Late is more than 10 seconds after execution
.P
- Prior Reference Price trade
- Lists both the actual executed time and the reference time
- The price reported is the actual executed prcie
Which FINRA members can sell short shares of an IPO at an agreed price, prior to the first trade of shares on an exchange?
This is a prohibited activity
Brokers and traders cannot agree, prior to an IPO, to buy or sell short shares of an IPO at a stated price. The rule applies equally to all FINRA members, not just syndicate participants.
Do ERISA (Employee Retirement Income Security Act) retirement plans permit options trading?
yes, as long as it meets the investment criteria of the plan
Bernice is a broker who executes options trades. If she sends orders to the CBOE for execution, in which case will these orders not be received by the CBOE in a systematized format?
when they are not transmitted electronically
Explanation:
A systematized transmission is one that is electronically submitted to the CBOE for execution. If an order is received in a non-electronic format, such as an order telephoned to a floor broker, the order must be input into CBOE’s electronic systems upon receipt at the CBOE. This allows the order to be captured by the COATS system.
T.3
indicates that market makers can begin quoting the stock, and 5 minutes later, may begin making a market in that stock
Investor who expects little volatility would want to enter what kind of straddle?
Enter a short straddle position (short call, short put)
A short combination will achieve the same
How long does a market maker have to update its quote?
30 seconds
NOOP
NASDAQ Official Opening Price
Net Purchase Limitation
On each day of the restricted period, a passive market maker’s net purchases cannot exceed the greater of 30% of the market maker’s daily trading volume (DTV) limit or 200 shares. The DTV limit is based off the market maker’s average daily trading volume in the security during the two full calendar months immediately preceding the filing of the registration statement.
Example
A market maker’s average daily trading volume in a covered security is 100,000 shares. Therefore, the market maker’s net purchases as a passive market maker may not exceed 30,000 shares. If the market maker has bought 80,000 shares on a given day and sold 65,000 shares, it is a net purchaser of 15,000 shares. Therefore, it can continue its passive market-making activities. Note that the market maker may buy more than 30,000 shares on any day but the net total, or purchases minus sales, may not exceed 30,000.
An investor buys a listed options contract on euros, at a time when the euro is worth $1.18 per dollar. The strike price is $1.20. If the euro rises to $1.25 near expiration, the investor stands to profit by
$500 per contract, less premiums paid.
Explanation:
Foreign currency options have a contract size of 10,000 units of currency i.e., euros. The exception is Japanese yen, in which size is 1,000,000 yen. This contract would be in the money by 5 cents X 10,000 units = $500. From this profit, the premium paid would be subtracted.
A passive market maker has a daily purchase limit of 7,500 shares. Since trading opened this morning, the firm has sold 3,000 shares and purchased 8,500 shares. It now receives an order from a customer who wants to sell 3,000 shares to the market maker. This passive market maker
May purchase the entire 3,000 shares and then withdraw its quote.
Explanation:
A passive market maker may purchase all of the securities that are part of a single order, even if the transaction would cause it to exceed its purchase limitation. Upon executing this transaction, the passive market maker would be required to promptly withdraw its quote from Nasdaq.
Manning rule
Limit order protection
- If a firm trades for its own account at or through a customer’s limit, it must execute the customer’s limit order within 1 minute
- Firms need not execute a larger order for a customer than it executes for its own account
- Any price improvement must be passed on to the customer
- does not apply to no-knowledge trades
- information barriers/Chinese walls
Broker G is a FINRA member and OATS Order Respondent. G outsources OATS reporting work to a third-party firm that provides back-office services but is not a FINRA member. What must G do to assure the non-member’s clock is synchronized?
Obtain a copy of procedures used by the non-member
Explanation:
A FINRA member can delegate synchronization responsibility to a non-member third-party. The member must obtain a current copy of the non-member’s synchronization procedures and then work with the non-member to fix any clock problems.
Order ticket required information
- account number
- timestamps (both receipt and entry)
- Notation if unsolicited or discretionary
- Locate requirement for short sales in any equity security
- Order instructions (market, limit, etc.)
- Security and quantity
- Time of execution
All of the following must be disclosed about any joint securities accounts held by a member or associated person, except
Addresses of all joint owners
Explanation:
Required disclosures include: the name and interests of joint owners; a statement of the account’s purpose; the name of the member carrying and clearing the account; and a copy of the written account instrument or agreement.
A Nasdaq market maker can request a withdrawal for operational difficulties from
Nasdaq Market Operations.
Explanation:
When a Nasdaq Market Maker needs to seek a withdrawal for technical problems, the request is made through market operations. For a withdrawal for any other reason, the request is made through MarketWatch.
4 dates for dividends
- Declaration date (company announces dividend will be paid)
- Ex-dividend date (first date stock trades without dividend)
- Record date (when, by the end of trading, individual must own stock to get dividend, so must settle by this date!)
- Payable date (when the dividend is dispersed)
Form 13H contents
Form 13H requires large traders to provide the following information:
◆ Businesses in which the large trader is engaged (e.g., broker-dealer, investment adviser, futures commission merchant, bank, pension trustee)
◆ Other SEC filings it is subject to (e.g., 10-Q, 13F)
◆ Disclosure of whether it is subject to futures regulators or foreign regulators
◆ Organization chart identifying the parent company and any affiliates in the securities industry
◆ Structure and governance of the large trader (e.g., trust, LLC, partnership, corporation)
◆ Disclosure of any general partners (if applicable) and any limited partners with interests greater than 10% in the accounts of the large trader
◆ Names of executive officers, directors, and trustees
◆ Locations of all prime broker, executing broker, and clearing broker accounts
Riskless principal
Broker dealer receives a customer buy order for a security and simultaneously purchases that stock for its own account to fill the customer’s order from its own inventory
Marked on trade report
Exceptions to Locate rule
If member marks order long and has no reason to know sale is short
Sale by member to offset customer’s odd lot orders
Bona fide market making or block positioner activities
* For example to provide liquidity
An investor who is bearish on the equity markets might deploy which of the following investment strategies?
Long VIX call option
Explanation:
The VIX is a tool used to measure market expectations of near-term volatility, based on S&P 500 Index option prices. Investors who are bearish generally believe there will be an increased level of volatility and would be likely to buy call options on the VIX.
If a company becomes ineligible to have its securities quoted on the OTCBB, how much notice will FINRA provide to allow a hearing, prior to removal?
7 days
Explanation:
FINRA provides at least 7 calendar days to allow an issuer to request a review, prior to removal.
Who makes the determination to trigger a short-sale circuit-breaker in a covered security, based on a 10% decline in price from the preceding day’s close?
The listing market
Explanation:
The determination of whether the price of a covered security has decreased by 10% is made by the security’s listing market (e.g. NYSE or Nasdaq). The information is then disseminated to all market participants.
Which U.S. broker-dealers are exempt from reporting requirements under the CAT system?
none
Explanation:
Although non-FINRA members are exempt from OATS reporting, there will be no reporting exemptions under the CAT system. All US registered broker-dealers must report.
Who is notified of a lock-up expriration?
the public and the issuer
Explanation:
The public and the issuer must be notified at least two business days before the lock-up expires or is waived. The public is generally notified by an announcement made through a major news service.
Broker-dealer T is a Large Trader. It effects transactions for an intermediary whom it believes may exceed the identifying activity level in an omnibus account. T may disclose the intermediary to the SEC as
An Unidentified Large Trader
Explanation:
The Large Trader discloses the existence of an Unidentified Large Trader intermediary by assigning a four-digit suffix to its own LTID. This may be done even if the broker-dealer only suspects that the intermediary may be exceeding the identifying activity level.
Which order is NOT exempt from the Limit Order Display Rule?
A De Minimis order
B Institutional order
C Odd Lot order
D Block Size order
The best answer is B.
The limit order display rule does not apply to block size orders (10,000 shares or more); de minimis orders (orders that are 10% or less of display size at the market maker’s quote, where the quote is at the inside); AON (all or none) limit orders; odd lot orders; or orders delivered to an eligible ECN. Institutional orders, unless they are of block size (10,000 shares or more) must be displayed.
Minimum Pricing Increments
NMS Rule 612
For stock $1.00+: $0.01
For stock less than $1.00: $0.0001
A company’s stock that is trading at $0.15 per share would typically trade on which platform?
OTCBB
Explanation:
Micro-cap, penny stocks, and shares of companies in bankruptcy typically trade on the for Over-The-Counter Bulletin Board (OTCBB) as they do not meet the listing requirements of exchanges such as NYSE, Nasdaq, and AMEX. The OTCBB is an electronic, regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities.
Imbalance indicator
Updated every 1 second (used to be 5)
likely opening price
indicates unpaired shares
NMS Rule 606—Order Routing
Broker-dealers that route customer orders in equity and options securities are required to produce quarterly reports on non-directed market and limit orders. These reports must be filed with the SEC and made available to the public within one month after the end of each calendar quarter.
Kevin is the registered rep assigned to the Holidays joint brokerage account. While Kevin is on vacation, another rep, June, agrees to cover the Holidays’ account for him. If the Holidays buys 200 shares of stock from June while Kevin is on vacation, whose name will go on the order ticket?
both Kevin’s and June’s
Explanation:
Books and records requirements mandate retention of all order tickets along with the name of the rep responsible for the account, the name of any other person who entered the order for the customer, whether the order was placed with discretion, and the time the order was received. Kevin is responsible for the account but June is responsible for the trade, so both names must be on the ticket.
For OTC equities, what happens to the percentage bands for clearly erroneous trades outside of normal market hours, compared to during normal market hours?
For OTC equities, there is no difference in the bands based on the time of the trade - during or outside normal market hours. For listed equities, the bands double outside normal market hours.
ABC Securities buys 200 shares of stock for a customer on an agency basis. The price of the transaction is $67.25 per share, including a commission of 50 cents per share. What price will be shown on the trade report?
$66.75
Explanation:
For agency trades, firms should report the number of shares traded and the trade price excluding any commissions charged. For buy trades, subtract the commission from the transaction price. For sell trades, add the commission to the transaction price.
The type of trading in which the violation of quote-stuffing occurs involves…
high-frequency trading.
Explanation:
Quote stuffing is a prohibited practice in which algorithmic traders enter and then quickly withdraw large orders to create confusing or slow market execution, so as to gain a price advantage.
What orders must be COATS systemized?
All orders! includes:
telephone orders
manual trades with hand signals on the floor
exchange transactions
Broker Dealer A receives an indication of interest of 3 million shares for an institutional investor. The investor ultimately is notified that it will receive 1 million shares but decides NOT to accept the allocation, returning the shares to the underwriter. Which of the following would not be a permissible activity with these returned shares, provided that they are trading at a premium?
Hold the shares in their investment account for at least 90 days and then sell them.
Explanation:
Under FINRA 5131, a member firm with returned shares can use the shares to cover a short, allocate them to investors randomly or donate the profits to charity (anonymously). The shares cannot be placed in the member firm’s investment account.
The agreement among underwriters will address how to handle returned IPO shares that trade
at a premium to the public offering price.
Explanation:
The agreement requires that any returned shares trading at a premium to the public offering price we used to cover short positions or sold with proceeds donated to charity.
Trade reporting timeline
Executing party:
Within 10 seconds (or as soon as practically possible)
Non-executing party:
Confirm with 20 minutes
During a LULD halt, which of the following is not allowed?
Trading
Explanation:
For a minimum of five minutes, trading is halted. However, quotes may continue to be displayed and orders accepted during an LULD halt.
Participation in the Over the Counter Trade Reporting Facility (ORF) is mandatory for any FINRA member that
Has an obligation to report an OTC transaction
Explanation:
The Over the Counter Trade Reporting Facility (ORF) is used for reporting OTC transactions. Usage is required for FINRA members.
Broker N has a system outage on Wednesday at 9pm. To request a FINRA determination that the outage is excused, Broker N must supply supporting information by
The close of business on Thursday
Explanation:
An ADF Trading Center that seeks a FINRA review of a system outage must supply supporting information by the close of business that day or on the following business day if the outage occurs outside normal market hours. FINRA normally will make a determination on the day after that.
In the Trade by Trade Match method of locked-in trade reporting, which party submits transaction data?
Both parties
Explanation:
Both parties to the trade submit transaction data and the ADF System performs an on-line match. The executing party is required to report a trade within 10 seconds of execution. The non-executing party submits for a match within 20 minutes.
How may a penny stock disclosure be sent to a customer?
By either postal mail or email
Explanation:
The penny stock risk disclosure may be sent by either postal mail or email at least two full business days before the transaction.
What term describes a short-sale in which the seller is unable to borrow or locate shares by settlement, and therefore can’t deliver them?
Naked
Explanation:
This is a naked short-sale. It is not the fact that shares have not been borrowed when the order is placed that makes it naked. Rather, it’s the fact that shares can’t be found or delivered on settlement.
Circuit break level 2 halt
13% decline in S&P 500
- in effect from 9:30 am to 3:25 pm
- 15 minute halt
- Quotes permitted in last five minutes
- Can only happen once per day
For pricing obligation purposes, what is the difference between a Tier 2 and Tier 3 security?
Whether the share price is above $1
Explanation:
Tier 2 Securities consist of NMS stocks that are not Tier 1 with a price equal to or greater than $1. Tier 3 consists of NMS stocks that are not Tier 1 with a price less than $1. The only difference is share price. Tier 1 includes S&P 500 and Russell 1000 stocks.
After an excused withdrawal and notification of an intent to reinstate quotes, how much time does a market maker have to meet its market making obligations?
After notification of a reinstatement of quotes, the market maker has 10 minutes to meet its market maker obligations.
Trader C marks a System Order with the instruction “MGTC.” If it is entered on March 5 and only partially filled, when will it expire?
In one year
Explanation:
Market hours good-til-cancel (GTC or MGTC) orders remain on display, in whole or part, until filled or until one year from entry, whichever comes first.
A market maker, acting on a passive basis during the business day prior to the effective date, has a daily net purchase limit of 12,000 shares. At 2:10 PM, its net purchases total 11,600 shares. The market maker then receives a customer market order to sell 500 shares. Which statement is TRUE?
A
The market maker is permitted to execute only 400 shares of the order
B
The market maker may execute the entire order
C
The market maker may execute the entire order only if it has an offsetting customer buy order
D
The market maker must refuse the order
B
Under Rule 103 of Regulation M, if a passive market maker is near its daily purchase limit, any single order which causes it to reach or exceed the limit will generally require it to seek an excused withdrawal for the remainder of the day. The market maker can execute the order in its entirety, which would then place it over the limit, and it must withdraw for the balance of that day, since its daily net purchases would now be 12,100 shares (which is over the 12,000 share daily limit in this case). Keep in mind that if the market maker sells stock in an amount which puts it back under the limit, as long as the firm reports both trades within 30 seconds of each other, it can remain as a passive market maker. (Note that this has nothing to do with the normal trade reporting rule.)
Which type of securities transactions are not subject to FINRA’s Uniform Practice Code (UPC)?
Municipal bonds
Explanation:
Municipal securities, exempt bank holding company securities and transactions in Direct Participation Programs are not subject to UPC.
XYZ common stock, an S&P 500 component, is currently trading 103-104 with a reference price of 100. At 2pm an order is entered to buy 300 shares at 108. What will be the impact of this order on the market for XYZ stock?
The price of the order will be adjusted and the stock will enter a limit state.
Explanation:
When an order comes in that is aggressively priced outside the LULD band (i.e. bid above the upper end or offered below the lower band), Nasdaq will price slide the order to the band. In this case, the 108 bid would be priced down to 105, which is the upper end up the LULD range (100 + 5%). The stock would then enter a 15-second limit state.
ABC stock is currently quoted 78.47-.52 with a last sale of 78.42. To repurchase shares under the Rule 10b-18 safe harbor, ABC could bid
$78.47 or lower.
Explanation:
Rule 10b-18 provides a safe harbor for issuers repurchasing their own stock. Under the rule, the maximum an issuer can bid is the greater of the highest current bid or last sale price.
An American Depository Receipt (ADR) may be quoted on the OTCBB if it is registered with the SEC and…
…Is not listed on a national securities exchange in the U.S.
Explanation:
The main requirements for ADRs to be quoted on the OTCBB are SEC registration and no listing on a national U.S. exchange. However, if the ADR is listed on a national exchange but does not qualify for dissemination of transaction reports on the Consolidated Tape, it still may be quoted.
A market maker is currently quoting $35.60 - $35.80 20 x 34 and is holding, but not displaying the following customer limit: Buy 50 shares at $35.60 and Buy 120 shares at $35.60. Which of the following is the smallest customer limit order that would require the market maker to update its displayed quote?
Firm must aggregate multiple, same-priced customer limit orders to determine whether the de minimis standard has been exceeded. Because the firm is holding, but not displaying orders to purchase 170 shares, once a new order is received for more than 30 shares, the aggregate customer shares would exceed the 10% de minimis exception for the 20 displayed round lots and the quote must be updated.
Investment Adviser M asks a client to write a personal letter to a prospect, stating that her experience with the adviser has been excellent. This is an example of
An prohibited testimonial
Explanation:
The Adviser’s Act defines advertising broadly. Any type of written communication addressed to one or more people, including a personal letter, is advertising. It is prohibited for advisers to solicit testimonials or use them in advertising. This adviser has solicited a testimonial and plans to use it in advertising.
A wealthy customer has asked ABC Securities, an NMS market maker, to help her sell 100,000 shares of a stock. The same customer is also using another market maker to sell another large block of the same stock. The customer requests that her two market makers work together to coordinate their quotes to ensure both blocks are executed under the best possible circumstances. Under what circumstance may ABC honor her request?
none, because it would be illegal quote rigging
Explanation:
It is not permissible for market makers to enter quotes purely for the purpose of creating a false appearance of market activity or manipulating stock prices. This is called quote rigging. The SEC has taken disciplinary action against market makers who worked together to coordinate the entry of quotes.
If a market maker receives a marketable customer order, when may the firm revise its quote?
Only after filling the order
Explanation:
If a customer presents a marketable order to a market maker, the firm must execute that order. To revise a quote after receiving a marketable order from the customer is backing away. After executing the order the market maker can then revise and update its quotes.
A market maker, quoting 11.50 - 11.75 (10 x 10) receives a customer limit order to buy 1,500 shares at 11.56. The market maker immediately delivers the order to an eligible ECN. Which statement is TRUE?
A
The market maker must update its NASDAQ bid for price, but is not required to show size
B
The market maker must update its NASDAQ bid for size, but is not required to adjust the price
C
The market maker must update its NASDAQ bid for both price and size
D
The market maker is not required to adjust its NASDAQ quote
The best answer is D.
Under SEC rules, an “eligible ECN” must distribute its best priced orders not only through the ECN, but also to NASDAQ and trade with non-subscribers who wish to trade at these quotes through NASDAQ. Thus, the ECN will be posting the better priced bid in NASDAQ, so the market maker is not required to do so.
Is COATS the same as OPRA?
No, OPRA (the Options Price Reporting Authority) collects, consolidates, and disseminates options market data (last sale and quotes) from options exchanges. Think of OPRA as the reporting facility for options transactions, similar to the consolidated tape or TRF.
When subject to a restricted period under Regulation M, a firm seeking an excused withdrawal must make this request when?
1 business day prior to the first complete trading session of the restricted period
Explanation:
A firm must request excused withdrawal status under Regulation M no later than the business day prior to the first complete trading session of the restricted period under Regulation M. Depending on the daily trading volume and public float of the security, the restricted period begins either 5 days before the new issue is priced or 1 day before the new issue is priced.
An investor has written a short naked put. To create a straddle the investor must
Sell a call
Explanation:
A short straddle is an option combination strategy that involves the sale of both call and put options on the same underlying asset with the same exercise price and expiration date. The investor will profit on a short straddle if the stock has little volatility.
Can investors trade OTCBB securities directly without the services of a broker dealer?
NO!
Investors must deal with broker dealers to buy or sell OTCBB securities; they do not have direct access to OTCBB services. The OTC Bulletin Board displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs). There are no minimum quantitative standards which must be met by an issuer for its securities to be quoted on the OTCBB.
Market maker
Commits its own capital to provide liquidity for a security; stands ready to buy/sell at all times
Rule 15c2-11 exceptions
Customer initiate trade
- “Natural” IOI (indication of interest)
- Only can quote to fill the order, can’t continue afterwards
Security traded on an exchange that day or the day before (recently delisted securities)
Piggy backing
For Limit-Up Limit-Down purposes, what defines a “Tier 2” stock?
It is not an S&P 500 or Russell 1000 component
Explanation:
Tier 1 stocks are components of the S&P 500 and Russell 1000. All other NMS stocks fall into Tier 2.
Independent unit aggregation
Each unit of a firm can aggregate on its own, but:
Firm must have info barriers
Traders can’t move around divisions
A protected bid is displayed by an automated trading center. It represents what price?
The highest available
Explanation:
Protected means a quote is the best bid or ask available on a national exchange or Nasdaq. It’s the highest current bid or the lowest current ask.
To create a butterfly spread, it is necessary to place orders for
four options, all with the same expiration and with three different strike prices.
Explanation:
A butterfly spread is created with four options, all with the same expiration and with three different strike prices.
Closing cross timeline
Begins at 3:55pm
- Disseminates closing cross order imbalance every second from 3:55 to 4:00pm (used to be very 5 seconds)
- MOC, LOC, and IO orders can be entered, modified, cancelled until 3:55pm
- At 3:55 MOC is no longer accepted, LOC accepted, but can’t be modified
- At 3:58pm, LOC no longer accepted
- From 3:58, IO orders can be submitted, but not modified/cancelled, until close
Broker-dealers are required to close out an open short-sale fail if the stock remains on the Threshold List for how many consecutive settlement days?
13
Explanation:
Regulation SHO requires a broker dealer to close out an open fail if the stock remains on the Threshold List for 13 consecutive settlement days.
Characteristics of NASDAQ extended hours
Greater volatility, wider bid-ask spread
“A market or limit order which is to be executed in whole or in part as soon as such order is represented in the trading crowd. Any portion not so executed is to be treated as canceled.” This is the description of a(n):
Immediate or Cancel order
Broker-dealers and associated persons may not compensate publications or members of the media for the purpose of
influencing or rewarding their actions.
Explanation:
FINRA restricts ways in which broker-dealers and associated personal may compensate publications and member of the media. Compensation may not be given directly or indirectly to influence or reward actions that have an effect on securities prices.
If a brokerage firm offers an alternative type of order that is triggered based on quotes, not trades, it must not label this
Stop or “stop-limit”
Explanation:
Any order labeled “stop” or “stop-limit” must be triggered based on transactions, not quotes. Firms may not label alternative order types based on quotes using these terms.
Which of the following is not an item that should be considered when using “reasonable diligence” to obtain the best possible execution for a customer order?
Average spreads in similar securities
Explanation:
Compliance with best execution standards involves consideration of various factors, including the character of the market, the size and type of transaction, the number of markets checked, and the accessibility of the quotation. Average spreads are not relevant.
Find max gain or max loss for option
Always include the premium (even when excluding fees)
Trade report is marked “as/of” when…
Trade occured earlier than the current day or when reporting the reversal of a trade from the previous day
Which type of issuer will lose the safe harbor protection for share repurchases if it buys shares at the opening transaction of the day?
All issuers
Explanation:
To qualify for safe harbor status, shares repurchases may not occur as the opening transaction in the consolidated system. This rule is for all companies, regardless of size. It is under the “timing” requirement.
Which securities are included in the NASDAQ Intraday Cross?
A NASDAQ listed issues
B NYSE listed issues
C NYSE-American (AMEX) listed issues
D All of the above
The best answer is D.
The NASDAQ Intraday Cross can include any stock in the S & P 500 Index and NASDAQ 100 Index - these include NASDAQ, NYSE and NYSE-American (AMEX) listed issues.
Which clocks of a broker-dealer must be synchronized before the market opens on each business day?
All associated with the order handling system software
Explanation:
FINRA does not require all clocks to be synchronized. This is an OATS-related requirement, so only clocks (computer or mechanical) associated with the order handling system software must be synchronized on a daily basis.
To know whether a trade may be “clearly erroneous” based on numerical guidelines, one must know
reference price and percentage band.
Explanation:
The numerical guidelines for a clearly erroneous trade are triggered when individual securities trade outside of percentage bands, based on their reference price. The reference price is the last sale price for exchanged-listed securities and the prevailing market price just prior to the time of the trade for OTC securities.
Under SEC Rule 10b-18 an issuer with an average trading volume less than $1 million per day or a public float value below $150 million is unable to
Trade its own securities within 30 minutes of the end of the trading day
Explanation:
An issuer with an average trading volume less than $1 million per day or a public float value below $150 million is unable to trade within the last 30 minutes of trading. Companies with higher average-trading-volume or public float value can trade up until the last 10 minutes.
The NBBO is $9.92 / $9.96 and the $9.96 offer is on another market center. If Dealer Q enter a Price-to-Comply buy order at $9.96, it will be displayed at
$9.95
Explanation:
Price-to-Comply are designed not to lock or cross the market. They are put on the Nasdaq book as non-displayed at the locking price. Nasdaq then displays the order at the most aggressive price allowed under Regulation NMS - one trading increment inside the locking price. If a seller asks $9.95, the order will execute against the Price-to-Comply order at $9.96.
All of the following transactions taking place in the OTC market are subject to the 5% Policy EXCEPT:
Transactions requiring a prospectus
The 5% Policy applies to secondary market transactions in both exempt and non-exempt securities that take place over-the-counter. It does not apply to new issues requiring a prospectus (primary market); nor does it apply to secondary market trades that take place on an exchange floor. It also does not apply to secondary market transactions in municipal securities, since these are covered by a similar MSRB rule.
Price Priority
A better price always takes precedence over a other prices (higher bid/lower offer)
A bona fide investor wishes to use the exception to the short-sale rule to short shares within the five-day restricted period and close the short position with newly offered shares. The latest this short sale can occur is
30 minutes prior to the close on the business day prior to the day of pricing.
Explanation:
An exception to Regulation M’s Rule 105 allows bona fide investors who meet certain conditions to short-sell within the five-day restricted period and close their positions with newly offered shares. To use the exception, the latest a short sale trade can occur is 30 minutes prior to the close on the business day prior to the day of pricing.
Lock-up
Insiders (CEO, CFO, board members) will often agree to a post-IPO lockup with the underwriter. Though not required, they typically last 180 days
How is a riskless principal trade treated for reporting purposes?
As one trade
E.g., if a broker dealer purchase 50,000 shares to fill an existing customer’s order for 50,000 shares, this would be reported as one transaction for 50,000 total shares, not 2 transactions for 100,000 shares
Joe places an order with Market Maker A to buy 100 shares of XYZ at $10.75. Which of the following activities would be prohibited while holding this order.
Buying 100 shares as principal at $10.755.
Explanation:
A market maker, while holding a customer’s order, is prohibited from trading on the same side of the market at the same order better price unless it immediately thereafter executes the customer’s order. In this case, to avoid a manning obligation the firm could trade for its own account at $10.76. The minimum price improvement that must be provided is $0.01, it could not trade better than the customer’s order by less than $0.01.
Trade reporting modifier .P
Late execution honoring price earlier than when trade actually happened Include: actual execution time actual execution price prior reference time of execution price
Print protection trade
Explanation:
A print protection trade is exempt from the Reg NMS Rule 611(a) trade-through rules, and allows broker-dealers to execute orders that were not executed because they are not at the top-of-book (“TOB”) in the market in which they are displayed but are priced superior to TOB orders executed in other markets.
An investor is bullish on the overall market but wants to limit loss. If he has sold an index call, which additional position could be added to help achieve this objective?
Buy a call with a lower strike price
Explanation:
By purchasing a call option with a lower strike price, the investor will create a bull debit spread, which has a bullish view.
For a quote in a stock that is a component of the S&P 500 index made at 11 a.m. during a trading day what is the Defined Limit?
9.5% from NBBO
Explanation:
For Designated Stocks, the Defined Limit is 9.5% from NBBO (or last trade) at all times except between 9:30 and 9:45 and 3:35 and market close.
OPRA contents
Includes options market data
- quotes
- last sale price’
- Open interest (number of open quotes in the market at any one time)
Dan is an options broker who works on the floor of the CBOE. He frequently executes trades at rapid speed using only hand signals. Tim is his assistant, who stands beside him to record the details of each trade. What will he do with these details immediately after the trade?
enter them into COATS in systematized format
Explanation:
All options orders must be systematized for COATS processing, including those transacted on the floor of the CBOE using hand signals. The information that must be captured includes options symbol, expiration month and year, strike price, buy or sell, call or put, number of contracts and Clearing Trading Permit Holder.
When a broker-dealer is determining its own net long or short position in a security it must aggregate all of its positions in that security unless it qualifies for independent trading unit aggregation. Independent aggregation allows each trading desk (i.e. unit) to determine its own position, if all of the below requirements are met:
- The broker-dealer has a written plan to identify each unit.
- Each unit determines its own net position for every security.
- Traders are assigned to only one unit.
- Traders from one unit do not coordinate with trades in another unit.
Options break even
Call
- call up
* net premium + strike price of the dominant position
Put
- put down
* subtract the net premium from the strike price of the dominant position
Downbid exemption
mark ticket as short exempt
- Person owns security subject to selling restrictions
- customer is long equivalent security
- Market maker offsetting odd lot
- foreign exchange arbitrage
- oversold new issue (green shoe)
- riskless principal trade
- volume weight average price (VWAP)
To resolve a customer dispute, a broker needs to verify the time an order was received from a customer. It was a limit order to buy 300 shares of a listed stock. This information is captured on…
…an OATS report.
Explanation:
Order receipt time is not required on a trade confirm. It is recorded by the OATS reporting system.
Rule 144 applies to which of the following?
Corporate insiders owning more than 10% of the company’s securities
Explanation:
Rule 144 pertains to owners of securities that were not originally sold under SEC registration. Corporate insiders include officers or directors of the issuers, as well as any entity owning greater that 10% of the company’s outstanding common stock.
In which case must a member firm post the Extended Hours Trading Risk Disclosure Statement on its Website?
If it allows online account-opening and trading
Explanation:
Regulators believe that investors who engage in online account-opening and trading are more likely to see a disclosure posted on a Website than to read it in hard-copy.
ADTV
Average daily trading volume
Base on the average of the past four weeks
Syndicate Covering Transactions
A syndicate covering transaction is a bid made by the underwriting syndicate to reduce the short position created in connection with the oversold offering.
The underwriter purchases shares in the secondary market to make delivery on the undelivered portion of the new issue. Underwriters generally prefer a syndicate covering transaction over a Rule 104 stabilization bid because there are no price restrictions and there is no disclosure requirement to the public. As a result, these transactions allow the underwriter to support the price without creating the perception that the deal is not being well received.
What orders are allowed for Closing cross
market hours orders, system hours orders, market-on-close, limit-on-close, imbalance-only
A customer with total assets of $75 million has placed an order to purchase 20,000 shares of XYZ on a “net” basis. Consent for this transaction
May be provided in a negative consent letter
Explanation:
When effecting “net” trades with institutional customers, a firm must obtain the customer’s consent prior to executing the transaction. The allowable methods to obtain consent differ between retail and institutional clients. Any entity with assets of at least $50 million (including an individual investor) is considered an institutional customer according to FINRA rules. The consent from institutional clients for net trades may be provided in a variety of ways, including a negative consent letter. The firm may also accept oral consent from the customer, as well as written consent.
What lots are reported
Round lots, odd lots, mixed lots
Post-trade execution reports should be provided to appropriate surveillance personnel in compliance with broker-dealer
Financial risk management controls
Explanation:
Broker-dealers with market access must have financial risk management controls in place to systematically limit the financial exposure of the broker-dealer that could arise as a result of market access. Among other things, these controls would prevent the entry of orders that exceed appropriate price or size parameters, as well as orders that appear to be erroneous.
When may a Market Hours Good Til Cancel (MGTC) order be placed?
From 4 a.m. to 8 p.m.
Explanation:
MGTC orders may be entered from 4 a.m. to 8 p.m. EST. But they may only be executed during market hours from 9:30 a.m. until 4:00 p.m. EST. Any unfilled amount remains on the books (unless cancelled) for one year.
Market maker W has just engaged in a syndicate covering transaction. It must notify
FINRA within one business day of completion of this activity
Explanation:
FINRA member firms must notify FINRA within one business day of completion of a syndicate covering transaction or the imposition of a penalty bid
FINRA 5% policy does not apply to:
New issues
mutual funds
municipal bonds
(they have their own rules)
A market maker can initiate market making activities in additional securities with the appropriate application to NASDAQ. Quoting may begin
That same day
Explanation:
When applying for registration status in additional securities, Nasdaq will typically review and approve the request on the same day, and quoting may begin immediately.
Regulation FD
Ensure fair disclosure to all investors
Disclosure of insider information requires disclosure to the public
- Intentional disclosure
Requires simultaneous public disclosure
- Unintentional disclosure
Requires disclosure within 24 or before the open of trading the next day
The rule against order-splitting prohibits splitting one order into multiple smaller items for purposes of
either trade execution or reporting.
Explanation:
Order-splitting, also known as tape-shredding, prohibits splitting one order into multiple smaller orders for either execution or reporting purposes. Often firms engage in order splitting to increase compensation or in-kind payments (e.g. soft dollars).
he Rule 10b-18 safe harbor applies to open market purchases by an issuer of its own
Common Stock
Explanation:
The Rule 10b-18 safe harbor only applies to open market purchases by an issuer of its common stock. It does not apply to an issuer’s purchase of securities related to the common stock, such as warrants, options, or single stock futures.
Market Maker Peg Orders (MPEG)
Automation of quotes so they don’t drift outside the defined limit
Trade modifiers outside normal market hours
.T timely
.U untimely
After reviewing a clearly erroneous stock trade, NASDAQ MarketWatch makes a written determination to nullify the trade. Which statements are TRUE regarding the written determination?
I Either side can appeal to the Market Operations Review Committee
II Appeals must be made within 1 hour of receiving written documentation
III Any decision made by the Market Operations Review Committee is final and binding
IV Any decision made by the Market Operations Review Committee can be submitted to arbitration
I and III only
Appeals of a NASDAQ MarketWatch decision on a clearly erroneous stock trade can be made to the Market Operations Review Committee (MORC) by either party to the trade - buyer or seller. Any appeal must be made within 30 minutes of receiving written determination (not within 1 hour). All decisions made by the Committee are final and binding.
For purposes of a stabilization bid, the “principal market” is defined as
The market with the largest aggregate volume for this class of securities over the last 12 months Explanation: SEC Regulation M, Rule 100, defines the principal market as having the largest aggregated reported trading volume for the class of securities during the full 12 calendar months immediately preceding the filing of the registration.
The ’34 Act defines a market maker as
- Any person (including any natural person, partnership, corporation, association, or other legal entity) that holds itself out as willing to buy or sell securities for its own account on a regular or continuous basis, or
- Any dealer acting as a block positioner (a type of market maker that is eligible to buy or sell blocks of stock with a current market value of $200,000 or more)
When one department of a broker-dealer transmits an order to another department of the same broker-dealer, which of the following items is not required to be recorded in an OATS report?
CUSIP number of the security
Explanation:
These OATS reports do not contain the CUSIP number of the security.
What do OATS reports include
Order identifier Broker dealer MPID Date of order origination Date and time of order transmission ATS must report trades to the TRF or ORF within 10 seconds of execution (unless there is an exemption)
Outlier trade
3x normal range (9%, 15%, 30%)
Get 60 minutes
Large trader with discretionary accounts
In the case of discretionary accounts, large trader status applies to the adviser or agent with trading discretion over an account, not to the account itself or to the beneficial owner of the account.
Public companies must disclose the average price paid per share at which they have repurchased shares over what time frame?
Monthly
Explanation:
Issuers must disclose the average price paid per share in a table included in periodic reports (10K or 10Q) for any quarter in which any share buybacks have occurred. It itemizes total number of shares purchased and average price per share on a monthly basis.
Broker-dealer W is an introducing broker-dealer, clearing all business through a registered clearing firm. Which OATS responsibilities can W fully outsource to the clearing firm?
None
Explanation:
Establishing a clearing relationship and transmitting all orders to a clearing firm does not relieve the member of full OATS responsibilities; the member firm remains ultimately responsible even if a reporting firm has been retained to facilitate reporting requirements.
A System Order is passively displayed on the order book at one price. At the same time, the trader seeks to access liquidity at a more aggressive price. It should be designated a
Discretionary Order
Explanation:
Discretionary Orders are passively displayed on the book at one price while also seeking to access liquidity at a more aggressive price. The discretionary portion of the order is not visible on the book, and only becomes active as an IOC order when shares are available within the discretionary range.
Key items for Covered calls
Position is created by owning the stock and selling a call against those shares
max gain = strike price - stock purchase price + premium received
A customer shorts stock which is on NASDAQ’s “threshold” (restricted) list. The following day, the stock is removed from the list. If there is a failure to deliver on settlement, which statement is TRUE?
A Mandatory buy-in is required after 13 consecutive settlement days
B Mandatory buy-in is required after 35 consecutive settlement days
C Mandatory buy-in is required only at the specific direction of NASDAQ
D Mandatory buy-in is not required
The best answer is D.
If a customer sells short a security and fails to deliver on settlement, Regulation SHO requires that the position be bought-in after 13 consecutive settlement days if the security is on the exchange’s list of “threshold” securities as of trade date and remains on the list during that entire time window. If the security is removed from the list after trade date, then the time window does not restart counting unless the security is added to the threshold list again (the list is updated daily). Basically, a “threshold” security is one that has a large outstanding short position - the SEC does not want large outstanding short positions that cannot be covered to build over time.
An alternative trading system (ATS) does not
Provide for disciplinary measures to be taken against its subscribers
Explanation:
An alternative trading system (ATS) does not discipline its subscribers other than by disallowing trading privileges
To avoid being reported late, must a pre-open trade be reported within 10 seconds?
Only if execution is after 8:00 a.m.
Explanation:
A pre-opening trade made before 8:00 a.m. must be reported by 8:15 a.m. EST. A pre-opening trade made after 8:00 EST must be reported within 10 seconds or else it is late.
MPID
Market Participant Identification
Securities that are included in the Pink OTC Markets are
quoted by market makers
Explanation:
A market maker determines whether to quote a Pink Sheets security, and initiates quotations by submitting Form 211 to FINRA. It is possible for a market maker to quote securities in the Pink Sheet Quote system without the knowledge or permission of the issuer of the securities. Pink Sheet Securities are not always registered with the SEC and are often thinly traded. All OTC equity securities are required to report last sale and trading volume information.
What is the deadline for filing a broker-dealer’s quarterly report on order routing for the second calendar quarter?
within one month after the end of the quarter
Explanation:
The 606 report for each calendar quarter must be made publicly available within one month after the end of the quarter. For example, the second quarter ends June 30, so the deadline is July 31.
A trade-through occurs when…
…a purchase or sale of an NMS security is effected at a price that is worse than a protected bid or higher than a protected offer. Here, the sale of securities at a price lower than the highest bid would be a trade through. On the purchase side, a trade-though would occur if the execution occurred a price higher than the current protected offer.
8:00 a.m. Thursday
Explanation:
The OATS report must be submitted by 8 a.m. on the calendar day following the end of the OATS business day. The OATS business day runs from 4:00:01 p.m. on one market day and ends at 4:00:00 p.m. on the next market day.
Monday
Explanation:
The Monday OATS business day begins at 4:00:01 p.m. on Friday and ends at 4:00:00 p.m. on Monday. The OATS report is required to be filed at 8 a.m. on Tuesday morning. Weekends are not counted as business days for OATS purposes.
The Trade Reporting Facility for NASDAQ
runs on the ACT platform and reports completed trades of NASDAQ issues
When-, As-, and If-Issued Contracts (WI)
Newly issued securities often trade on a when-, as-, and if-issued basis—shortened to when-issued or WI. This means:
◆ For equities—The IPO offering date and price have not yet been
finalized.
◆ For debt—The offering date and coupon rate have not yet been finalized.
When-issued securities are most common for new issues where the securities
do not yet trade. Securities trade WI until the offering date. If enough interest
exists for the new issue, the offering is finalized and the WI settlement date is set.
What is the normal length of time an ADF is granted an excused absence from submitting quotes/responding to orders?
Five business days
Excused withdrawals based on circumstances beyond a Center’s control (e.g. equipment failure) may be granted by FINRA for up to five business days, unless extended by ADF Operations. Excused withdrawals are not permanent in nature.
If a broker-dealer sells a penny stock on an agency basis, it must disclose the best bid/offer price obtained through reasonable due diligence. This can be demonstrated by obtaining quotes from
at least other three market makers.
Explanation:
Due diligence, for this purpose, means obtaining independent interdealer quotes from at least three market makers.
When is a market maker’s obligation to meet pricing obligations suspended?
During trading halts, suspensions or pauses
Explanation:
Market makers must meet pricing obligations during regular trading hours, except when trading is halted, suspended or paused.
ADF market partcipant
A FINRA member that has been approved for ADF trading
Market makers are
Exempt from the Regulation SHO locate requirement provided their sales are connected to bona fide market making activity.
Explanation:
NASDAQ Market makers are exempt from having to comply with the locate requirement under Regulation SHO.
If an issuer does not want to be subject to penny stock requirements, it should have net tangible assets in excess of
$2 million
Explanation:
The definition of what is not a penny stock includes stocks of large issuers with net tangible assets in excess of $2 million or average annual revenues of at least $6 million for the last three years.
Interpositioning
Introducing additional parties to a securities transaction to generate additional income
Prohibited, unless it results in a superior price (equal price still no good)
NOCP
NASDAQ Official Closing Prcie
Used by mutual funds to calculate NAV
Quotation requirements for market makers
Market markers must maintain quotes reasonably related to the market
Lower priced and less liquid stocks have wider band
Stop stock transaction
Price is guaranteed to customer for a short period of time
so they can shop around
Stop limit order
becomes a limit order when there is a trade at or through the stop price
If a buy limit order is marked “DNR,” what adjustment must be made to its price before the open on the ex-dividend date, assuming a 2-for-1 split?
It will be halved
Explanation:
A “DNR” (do not reduce) instruction applies only to cash dividends - not stock distributions or splits. The instruction is ignored in the case of a stock split.
Broker-dealer B receives a customer order to buy 100 shares of ABC. BD B buys 100 shares of ABC from the market at $60 and then resells the shares to its customer at $60 plus commission. This is an example of what type of trade?
Riskless Principal
Explanation:
Trades effected in this manner are examples of riskless principal trades
The Limit Order Protection Rule is in effect:
whenever a trade is executed per the customer’s instructions
Limit orders must be protected at whatever time they are executed, as long as the order is being filled during the TIF (Time In Force) specified by the client.
Which total short positions must broker-dealers report to FINRA periodically?
Both proprietary and customer
Explanation:
Total short positions must be reported through the Regulation Filing Application (RFA) for both proprietary and customers. The filings are made on the 15th and last day of each month.
FINRA has the authority to declare trading halts on
Both NMS stock and OTC trading
Explanation:
FINRA has authority to halt trading on exchanges in any NMS stock whenever an exchange imposes a trading halt. It also may halt OTC trading for specified reasons.
If an issuer files periodic reports with a regulatory authority other than the SEC what information about periodic filings must a market maker provide prior to quoting the securities on the OTCBB?
Identity of the regulatory authority
Explanation:
The market maker reports on Form 211, Part 4 the identity of the regulatory authority with which the issuer files periodic reports.
What happens if a trade is not confirmed in 20 minutes?
It automatically clears (not frozen)
Jim owns 5,000 shares of Issuer U. When accepting a sell order for these 5,000 shares, Broker-dealer C
May accept the order once it has received assurance that Jim will deliver the shares upon removal of any delivery restrictions
Explanation:
Broker-dealer C may accept Jim’s sell order so long as it has been reasonably informed that Jim will deliver the securities once all restrictions on delivery have been removed
Broker-dealers must make publicly available a report on its routing of non-directed orders in NMS securities
how frequently?
On a quarterly basis
Explanation:
Broker-dealers must make publicly available for each calendar quarter a report on its routing of non-directed orders in NMS securities during that quarter.
Trading ahead
Prohibited
Trading securities based on non-public advance knowledge of the content of an upcoming research report
If traders have advance knowledge, they may not trade on that information
A Large Trader has discretionary authority over aggregate transactions in NMS securities exceeding the share volume and fair market value thresholds. The thresholds are based on trading over which period?
Either daily or monthly
Explanation:
The test for a Large Trader is based on aggregate NMS transactions calculated by a daily test (2 million shares or a fair market value of $20 million) or a monthly test (20 million shares or a fair market value of $200 million). Either test may be met. These are called identifying activity levels - i.e., they identify Large Traders who must self-report to the SEC.
What information is required to determine that a private firm is not a “covered nonpublic company,” for purposes of the rule against spinning?
Income, shareholders’ equity, total assets and total revenue
Explanation:
To determine that a private company is not covered, all four items of information must be evaluated.
Additional registrations for a CQS market maker are effective:
Once a member is registered as a Third Market Maker, additional registrations are effective when requested - that is, on the day of request. NASDAQ has the same rule for additional registration requests.
For penny stock disclosure purposes, what defines a contingent compensation arrangement?
Compensation is determined and paid after the transaction
Explanation:
Compensation is determined following the transaction, based on aggregate sales volume or other contingencies.
The independent bids for a covered security are reduced to a price below the passive market maker’s bid. Which of the following statements is correct?
The passive market maker may purchase the lesser of two times the minimum quote size for the security, or its remaining purchase limit.
Explanation:
Once the independent bids are reduced to a price below the passive market maker’s bid, the firm may purchase the lesser of two times the minimum quote size for the security, or the remainder of the passive market maker’s purchase limit.
When Market Maker B enters a quote in the OTCBB, this quote…
…Must be firm up to the applicable minimum quote size
Explanation:
All quotes entered into the OTCBB must be firm up to the applicable minimum quote size for the security. The minimum quote size varies based upon the price of the security.
Firm C has a Two-Sided Obligation to make a market in ABC Co. common stock. If trading in the stock is suspended, when does the obligation re-commence?
After the first regular way trade in the primary listing market
Explanation:
The Two-Sided Obligation is suspended during a trading halt, suspension or pause. It re-commences after the first regular way trade in the primary listing market.
A fund manager oversees a well-diversified portfolio consisting of large cap U.S. stocks with a combined value of $10,000,000. The current level of the S&P 500 is 2000. How many S&P contracts are needed to hedge this portfolio?
To calculate the number of contracts needed, divide the total portfolio by the value of the S&P 500 (10,000,000/2,000 = 5000). Because the multiplier for S&P 500 contracts is 100, divide the result by 100 to determine the number of contracts (5,000/100 = 50 contracts). The portfolio valued at $10,000,000 can be hedged with the purchase of 50 put contracts.
Exemptions form penny stock trade suitability requirements
- unsolicited orders
- institutional accounts
- firms who receive less than 5% of their commission revenue from penny stock trades
SEC filing requirements for NASDAQ
Must be Current
10-K, 10-Q, 8-K, etc.
Net trades/net transactions
When a broker dealer commits its own capital to facilitate a trade but charges a markup on the second leg of the trade
It’s okay, but looks like front running
uncollared market orders are permitted when?
during crosses
The exceptions to the Manning Rule are for
1) large and institutional orders;
2) no-knowledge (a separate proprietary trading unit with information barriers);
3) ISO sweep orders; and
4) odd lot and bona fide error transactions.
Firm’s must adhere to Manning when executing orders in discretionary accounts.
When comparing the execution quality of its current order routing arrangements to the execution quality of other markets, which of the following is not a consideration?
The time of executions
Explanation:
In evaluating differences amongst markets, and evaluating its own order routing and execution arrangements, the time of execution of orders is not a factor in the review of execution quality.
Under FINRA OTC rules, what is a block
10,000+ shares and $100,000+ value
Syndicate covering transactions
An underwriter purchases securities in the open market to make delivery on an oversold new issue
green shoe clause (force the issuer to register 15% more shares)
Should a market maker consider its own costs (or basis) when determining mark up or mark down?
No, instead they should look to the current market price
If a short sale price test restriction is triggered where can un-displayed orders (including those in dark pools and ATSs) be executed?
at a price above the current national best bid
Explanation:
If the short sale circuit breaker in Rule 201 has been triggered for a covered security, an un-displayed “dark liquidity” short sale order may only be executed at a price above the current national best bid.
On the CBOE, the execution of contingency orders depends on the
last reported price of the underlying security, as reported on the primary exchange
Explanation:
Execution of all contingency orders depends on the last reported price of the underlying security, as reported on the primary exchange. In most cases, the primary exchange is the NYSE or Nasdaq.
A market maker wants to increase its order flow from ABC Securities, a broker-dealer. If ABC agrees to route a given volume of its order flow to the market maker, the market maker says it will allow ABC to participate as an underwriter in an upcoming public offering. Under what circumstance is this arrangement allowed?
ABC must adhere to the Order Protection Rule and best execution mandate and disclose payments to customers.
Explanation:
This is an example of a payment for order flow made through in-kind services. Such services may include research, clearance, custody, adjustments to unfavorable trade errors, and offers to participate as an underwriter in a public offering. The main requirements are that the originating firm (ABC) must: 1) adhere to the Order Protection Rule and best execution mandate; and 2) disclose any payments for order flow to affected customers.
Complex order
Allows customer to place a single order involving multiple options positions together (e.g. spread order)
The modifier .E appended to the stock symbol of an OTCBB company indicates that the:
issuer is delinquent in its regulatory filings
The modifier .E means that the issuer is delinquent in its regulatory filings. In order to be quoted, OTCBB issuers must be current in their SEC filings, or for insurance company and bank issuers, with the filings made with insurance or banking regulators. Issuers, once delinquent, are allowed a grace period of 30 days for SEC reporting; or 60 days for reporting to other regulators; during which quotes can continue in the OTCBB. After the grace period expires, quotes in the OTCBB are not permitted if filings have not been made.
Circuit break level 3 halt
20% decline in S&P 500
- Market closes for the rest of the day
- In effect all day (9:30 am to 4:00 pm)
FINRA may grant an Alternative Trading System (ATS) an exemption from trade reporting obligations, provided it is consistent with
Investor protection and public interest
Explanation:
FINRA will grant an exemption to trade reporting only if four conditions are met, and also if the exemption is consistent with investor protection and the public interest. In such circumstances the “executing party” to the trade (typically the seller) is required to report the trade.
ECN
An ADF ECN is a FINRA member that operates an electronic trading network and has been approved for ADF trading. ECN stands for Electronic Communications Network.
A security can be quoted on the OTCBB if it is not listed on a national exchange, or otherwise if it is
being delisted
Explanation:
The OTCBB allows market makers to quote securities that cannot be listed elsewhere, including those of unlisted and delisting companies.
Broker-dealer S receives an order from a customer to buy as many shares of ABC Co. as it can with $100,000. For purposes of OATS Reporting, this type of order is considered
Cash Not Held
Explanation:
This is considered a cash order or Cash Not Held. It is coded into OATS as CNH. There is no need to then submit a Cancel/Replace report to reflect a change in share quantity due to market fluctuations because the system knows shares will be purchased at fluctuating prices up to the cash limit.
A customer who buys 300 shares of stock through a limit order can expect to find all of the information on the order ticket except
CUSIP # of securities bought.
Explanation:
CUSIP numbers, the unique identification code for securities, are not usually found on the order ticket. Rather, most stocks are identified on the ticket by name or symbol.
What term describes a manipulative operation involving two or more participants, in which trading is for the purpose of unfairly influencing the market price?
Stock pool
Explanation:
Stock pools are organized to manipulate securities and market prices through coordinated actions between two or more participants.
How are most trades cleared?
Through a clearing house
The specific orders and securities that must be reported in a broker-dealer’s quarterly report on routing are
Non-directed orders in NMS securities
Explanation:
Under Rule 606, broker-dealers must make publicly available for each calendar quarter a report on its routing of non-directed orders (market or limit) in NMS securities during the quarter.
When are OATS reports due?
8am on the calendar day following the OATS business day
Example:
- OATS reports generated at 3pm Monday, OATS business day is still Monday, filing deadline is 8am Tuesday
- OATS report generated 2pm Friday, OATS business day is Friday, filing deadline: 8am Saturday
- OATS report generated 6pm Tuesday, OATS business day is Wednesday, filing deadline is 8 am thursday
- OATS report generated 5pm Friday, OATS business day is Monday, report filing deadline is 8am Tuesday
Albert, a registered rep, begins a conversation to discuss a proposed investment with a client at 9:42 am. The client agrees to buy 200 shares of a stock at 10:05. Albert writes the order ticket at 10:07 and submits it to an electronic trading system for execution at 10:09. It is executed at 10:11. What times must his firm preserve in its books and records?
10:05 and 10:09
Explanation:
Firms must maintain records of orders to buy or sell securities that include: 1) the time the order was received; and 2) the time of entry (when the firm transmits the order for execution). For verbal orders, receipt is when the client agrees to the terms of the transaction.
The limit order display rule requires customer limit orders be displayed. Exceptions to the display requirement include
1) orders that are executed upon receipt,
2) orders that are immediately routed to a national securities exchange or an electronic communications network,
3) an “all or none” order, or
4) a block size order. For this rule, a block size order is defined as at least 10,000 shares or for a quantity of stock having a market value of at least $200,000
So, order for 7,500 shares with a value of $100,000 is not a block size and therefore must be displayed.
To be granted by Nasdaq, market maker withdrawal requests based on legal or regulatory requirement must be supported by a statement that the problem
is not permanent in nature.
Explanation:
Nasdaq wants to know that the market maker can address legal or regulatory problems in some fashion. Otherwise, it may terminate registration in some or all securities.
ISO
Intermarket sweep order
- Can perform a large order on one exchange IFF you hit one superior quote on every other exchange
- Exception to order protection rule
All of the following investors would benefit from the purchase of an S&P 500 put EXCEPT
An investor who wishes to generate portfolio income and believes that the market is likely to remain flat
Explanation:
An Index put allows the investor to profit from a downward move in the level of the market as measured by S&P 500 index, while committing less capital compared to the margin requirements needed for the short sale of a number of component issues. A long put holder is not subject to the unlimited upside risk that applies to investors with short stock positions. The maximum loss to the investor is the premium paid.
Rule 10b-18
A company can repurchase up to 25% of its average daily trading volume in any particular day. (for illiquid stock: 1 block purchase per week)
purchase price:
greater of highest independent bid or last independent sale price
Safe harbor (but think of it like a rule)
Bids/purchases through one market maker per day during normal market hours
Should not be during open or last 30 minutes of trade
For actively traded securities ($1million ADTV & $150million public float)
should not be during open or last 10 minutes
Company can do buy back 4 weeks after IPO
An institutional customer selects one firm to provide custody and financing of securities, while orders to buy or sell are placed with executing brokers. This is an example of a:
prime brokerage account
A prime brokerage account is one where a customer, generally an institution, selects one broker (the prime broker) to provide custody and financing of securities purchased, and other brokers (executing brokers) to buy and sell on behalf of the customer. Unlike a prime brokerage account which involves a customer, a give-up clearing arrangement is between two members. For example, member firm A agrees to settle and clear all trades entered by member firm B.
The public offering price of XYZ was $20.00. The last independent transaction was effected at $17.50. The current quote is $17.10 - $17.90. Where may stabilization occur?
$17.50
Explanation:
Since the current ask ($17.90) is greater than the last independent transaction ($17.50), the stabilizing bid may be placed at $17.50.
New quote pricing requirements for Market Makers
Within 8% of the inside market
What is the 5% policy for debt securities
First, it should reflect the prevailing market price, which is established by the firm’s contemporaneous costs/proceeds
Reg NMS 605 and 606
Require uniform information on where customer orders are being route and the quality of execution being received
Rule 105—Short-Selling in Connection with a Public Offering
Rule 105 prohibits anyone from purchasing securities in a public offering if that person sold the same securities short within the five-business-day period preceding the pricing of the offered securities. The purpose of the rule is to prevent an investor from shorting a significant amount of stock just prior to the pricing of a follow-on offering and subsequently closing that short position by repurchasing the stock at the now depressed offer price. To do so is manipulative and a violation.
Regulation M Rule 105 restrictions on short sales and purchases during the restricted period apply to all investors. The rule does not apply to short sales executed more than five business days before the pricing of the new issue.
Nasdaq’s online list of Short-Sale Circuit Breaker stocks shows the Trigger Time for ABC Co. stock as 9:30:47 AM. What does this signify?
The time at which the price fell 10% from previous day’s close
Explanation:
The Trigger Time is the second at which the stock dropped 10% from the previous day’s close. At that point, the short-sale circuit-breaker is triggered for the remainder of that trading day and the entire next trading day.
Approvals necessary for net transactions
retail customers must consent in writing trade-by-trade institutional customers: - Negative consent letter, or - verbal consent trade-by-trade, or - Written consent trade-by-trade
A reverse pegged order to sell is placed at the:
inside bid plus $.01
Peg orders dynamically track the inside market - their price movements are “pegged” to the movements of the NBBO. A “market peg” order (a reverse peg order) is tied to the opposite side of the NBBO. Thus, a market peg order to buy is tied to the inside ask. A market peg order to sell is tied to the inside bid. A reverse peg order to buy is placed at the inside offer less at least $.01. This means that the pegged bid will be lower than the inside ask, so there will not be a lock or cross. A reverse peg order to sell is placed at the inside bid plus at least $.01. This means that the pegged ask will always be higher than the inside bid, so there will not be a lock or a cross.
What type of control must a broker-dealer have over its own risk management controls and supervisory procedures?
Direct and exclusive
Explanation:
Controls and procedures must be under the direct and exclusive control of the broker-dealer that provides market access. They cannot be delegated or outsourced.
Bob wishes to sell 100 shares of DEF. The broker dealer holding his account executes the trade as principal, includes a $0.15 mark-down, and submits a timely trade report indicating a price of $15.20. What proceeds will Bob receive per share?
When reporting principal transactions, any mark-up, mark-down, or commission is not included in the trade report. Therefore, the reported price of $15.20 does not include the $0.15 fee Bob pays the broker dealer for executing the transaction. Net of fees Bob will receive proceeds of $15.05 per share.
For Nasdaq to declare an obvious error in a listed options trade, the price must fall outside bands based on what price?
Theoretical Price
Explanation:
Theoretical Price is an estimated price based on either by the market price or by Nasdaq MarketWatch.
A buy limit order has been placed for 5 shares. If a 3-for-2 stock split then occurs, how many shares will appear on the adjusted order, after the open on the ex-distribution date?
7
Explanation:
Technically, a 3-for-2 stock split will produce 7.5 new shares. However, if the calculation produces a fractional number of shares, the order is adjusted down to the next whole number of shares. To calculate the new number of shares, multiply by the first number of the split and divide by the second: 5 x 3 / 2 = 7.5, which again, is rounded down to 7.
ACT
Reporting trades software
For manual reporting of transactions
Reporting requirement for trade cancellations
If executed during normal hours and cancelled on same day during market hours: within 10 seconds
If executed during normal hours and cancelled on same day after market hours: best effort by 8pm otherwise T+1 by 8pm
BASICALLY: report by the next 8pm
OATS applies to:
Exchange listed securities
OTC equity securities
When is the Trade confirmation provided
Provided at or prior to completion of transaction (i.e. settlement)
A customer enters a limit order to buy 200 shares of an NMS stock at $42.15 per share. At the time, the NBBO is $42.20-$42.22. This limit order is
Near-the-quote
Explanation:
To be near-the-quote, a buy limit order must be lower by 10 cents or less than the national best bid at the time of order receipt. A sell limit order must be higher by 10 cents or less than the national best offer.
Limit-on-open
Takes specified price or better on open
The volume requirement of the issuer share repurchase safe harbor restricts the number of shares an issuer can buy back per
day
Explanation:
The issuer may not repurchase more than 25% of the ADTV per day. The ADTV is based on four full calendar weeks preceding the week in which each share repurchase is made.
To receive an exemption from trade reporting, an ATS must agree to provide trading volume data to FINRA how often?
Monthly
Explanation:
All of four conditions must be met for an ATS trade reporting exemption. One is that the ATS agrees to provide FINRA monthly data on the volume of trades executed.
What is the minimum net capital a prime broker must maintain?
A prime broker is a firm that performs a suite of services for hedge funds and other institutions.
Prime brokers must maintain minimum net capita of at least $1.5 million.
Under SEC rules, limit orders from which of the following must be protected by a market maker?
I Orders from customers of the market maker
II Orders from another member for customers of that member
III Orders from another member for that member’s proprietary trading account
I and II
The limit order protection rule applies to customer limit orders - not to member firm proprietary limit orders. Also note that customer limit orders must be protected whether they come from that market maker’s own retail base of customers or from the customer base of another member.
Market Maker G bids $47.50 to buy 800 shares of XYZ Co. If G receives an offer from a dealer to sell 600 shares at the market, how many must it buy from the dealer at that price?
600
Explanation:
A firm quote means that a market maker executes transactions of at least the size displayed, at the price bid/offered.
What equities could be quoted on the OTCBB by a market marker without filing Form 211?
An equity that traded on Nasdaq earlier that day but was delisted
Explanation:
Unlisted equities or equities that trade only on a regional exchange can be quoted on the OTCBB after filing a Form 211 provided the issuer is current in its SEC filings. There are three exceptions to the requirement to file a Form 211: 1) piggybacking (quotes on at least 12 of the last 30 days and no more than four days in a row without a quote), 2) unsolicited customer orders, and 3) securities that traded on an exchange either that day or the previous day (i.e. recently delisted). Here, an equity that traded on Nasdaq earlier that day but was then delisted could be quoted on the OTCBB without a Form 211.
ACT hours of operation
8 am - 8pm
When open, reporting due within 10 seconds
when closed, reporting due by 8:15 am next time they are open
Brian calls his registered rep and asks for the NBBO on shares of EDD common stock. The rep indicates it is $25.64-$25.69 12x4. Brian places a market order to sell 100 shares, and asks for an estimated gross proceeds per share, inclusive of any fees and commissions. What is the best estimate the rep can give Brian?
Less than $25.64
Explanation:
By placing a market order to sell Brian’s will sell shares at the national best bid, and pay his firm a fee. Here, the market is $25.64-$25.69, so Brian will sell shares to the highest paying buyer, receiving $25.64 per share, minus the fees Brian must pay for the brokerage. Therefore, the best estimate of the gross per share proceeds will be less than $25.64 per share.
FINRA Rule 5131 requires the lead manager to provide the issuer with
regular reports of indications of interest including the names of institutional investors and the number of shares indicated by each along with aggregate retail demand. After settlement, a final report with similar information must also be provided. Reports are submitted to the issuer’s pricing committee or, in the absence of one, to the board of directors.
On the CBOE, the execution of contingency orders depends on the
ast reported price of the underlying security, as reported on the primary exchange
Explanation:
Execution of all contingency orders depends on the last reported price of the underlying security, as reported on the primary exchange. In most cases, the primary exchange is the NYSE or Nasdaq.
Price substantially unrelated to the market (i.e. a gift), who reports?
the seller
Jane wishes to sell 100 shares of XYZ when it is trading at $35.00 per share. The broker dealer holding her account executes the trade at that price and takes a profit through a $0.30 mark-down. What price will be reported to the reporting facility?
When reporting principal transactions, any mark-up, mark-down, or commission is not included in the trade report. Therefore, the firm must submit the full $35.00 share price to the trade reporting facility, regardless of whatever fees it charges its clients. Note that Jane will receive only $34.70 in proceeds from the sale, because the firm charges 30 cents per share fee to execute.
If a firm is in receipt of nonpublic advance information from a research report it must place any customer orders
on an agency basis.
Explanation:
The rule against altering inventory means the firm cannot trade for or from its own inventory - on a principal basis. It must accept customer orders on an agency basis only.
A market maker on the floor of the CBOE gives a firm quote without stating a size. This quote is good for:
10 contracts
If no size is stated, a quote from a market maker on the CBOE is good for 10 contracts.
Who publishes non-OTC threshold securities
The SRO (such as NASDAQ or NYSE) that owns it
A market maker effects an agency cross transaction of 400 shares at 41.00, charging the buyer a commission of 50 cents per shares and the seller a commission of 38 cents per share. Under ACT/TRF rules, the tape report is:
400 shares at 41.00
Under ACT/TRF reporting rules, in an agency cross transaction, the trade is reported to the tape only once, at a net price exclusive of commissions, mark-ups or mark-downs. In addition, a non-tape report is required that identifies the parties to the trade that were not named in the tape report. For example, assume in this case that BD1 crosses the buy and sell order between BD2 (buyer) and BD3 (seller). The following reports are required:
Reporting As A Cross - BD1 executed the trade, so it reports.
Tape Report: BD1 400 shares at $41 as a cross;
Non-Tape Report #1: BD1 buys from BD3
Non-Tape Report #2: BD1 sells to BD2
In the compensation disclosure for the sale of penny stocks, what must be disclosed when a contingent compensation arrangement exists to reward an associated person?
Both cash and other compensation
Explanation:
In contingent compensation arrangements, both cash and other compensation paid to associated persons for penny stock transactions must be disclosed.
The NASDAQ system that has tools to assess and manage credit risk is:
ACT
The ACT system has risk management tools such as the single trade limit, gross dollar threshold, pre-alert and super cap. Essentially, these tools give special notice to the clearing broker of very large trades executed by correspondent brokers, so that the clearing broker can review the trade before accepting it for clearance and settlement. ACES Pass Through is the system that allows NASDAQ order entry firms to contract with a market maker for limit order entry and maintenance in the NASDAQ Market Center. FQCS is the Firm Quote Compliance System that allows member firms to complain to NASDAQ about a member firm that is “backing away” from its quotes. TRF is the Trade Reporting Facility - an automated trade reporting and reconciliation service operated on the ACT platform. TRF reports trade price and volume for NASDAQ listed securities and for third market trades of exchange listed stocks.
FINRA has the authority to impose a market-wide circuit breaker on
All OTC trading of NMS stocks
Explanation:
FINRA can impose a market-wide circuit breaker on all OTC trading of NMS stocks in response to extraordinary market conditions or if it is so directed by the SEC.
Minimum price improvement for NMS stocks trading at $1.00 or more
1 penny
If a firm is registered as both a broker dealer and an investment adviser, in what capacity is it more likely to fill customer orders?
As agency capacity rather than principal capacity
A trade is executed at 9:15 a.m. and is reported one minute later. The trade report
Is considered late and must include .U modifier
Explanation:
Trades executed between 8::00 a.m. and 9:29:59 a.m. must be reported within 10 seconds. If not reported within 10 seconds, the trade report must include a .U modifier
OTC Securities
Can NOT quote nationally listed stocks & ADRs
Can quote regionally listed socks
Lots of volatility
Low volume
For stocks quoted at prices of $1 or more, the maximum fee a trading center may charge for access to quotes is
three tenths of a cent per share.
Explanation:
Trading centers may not charge for access more than $0.003 per share - three tenths of one cent.
Issuers may not purchase their own shares during a period in which they make
a distribution of securities.
Explanation:
Under Regulation M, Rule 102, issuers’ share purchases are restricted during any period in which they make a distribution of securities. They may not bid, purchase, or cause others to bid or purchase their securities during the restricted period with some exceptions for actively traded securities. When an issuer announces a merger or acquisition it may still buy its own shares but will not have the protections afforded by the 10b-18 safe-harbor (though the safe harbor remains available if it is an all-cash transaction with no valuation period).
WTF is the Manning rule
The “Manning Rule” is the limit order protection rule. It prohibits NASDAQ and OTC market makers from “front running” customer limit orders.
When must the compensation paid to an associated person of a broker-dealer, for selling a penny stock, be disclosed?
At or prior to receipt of the order
Explanation:
Broker-dealers must disclose any cash compensation paid to associated persons who have communicated with the customer, at or prior to receipt of the order.
After a mandatory five-minute halt, an LULD halt ends when
the primary market reports a reopening price.
Explanation:
After the mandatory five-minute halt (plus any extension by the primary exchange), trading resumes when the primary market reports a reopening price.
Trader Z wishes to mark a System Order so that any shares not executed on entry will remain available for execution for the next three hours only. She should mark the ticket
SHEX
Explanation:
SHEX stands for System Hours Expire Time. If any part of the order is not executable upon entry, unexecuted shares remain available for execution for the time specified.
Do order routing reports under Rule 606 apply to all customer orders?
No, Rule 606 reports apply only to non-directed market orders and limit orders.
The OCC assigns exercise notices on a:
random basis
The OCC assigns exercise notices on a random basis. The member firm, once it receives an exercise notice from the OCC, has a choice of assignment methods - random, FIFO, or any other method that is fair and reasonable.
The Designated Percentage
New bids and offers must be no more than the Designated Percentage away from the current NBBO. During most of the trading day, the percentage is 8% for Designated Stocks. Thereafter, the quote can drift to no more than the Defined Limit away from the NBBO. The defined limit is usually 1.5% more than the designated percentage.
The latest time to trade an index option (other than during a closing rotation) is:
4:15 PM EST (3:15 PM CT)
Unlike equity options, which stop trading at 4:00 PM ET; index options stop trading at 4:15 PM ET.
What term is defined to mean a dealer’s contemporaneous cost paid to acquire a security?
Prevailing market price
Explanation:
Prevailing market price relates to the dealer’s own contemporaneous cost to acquire securities or proceeds from a sale. The term “contemporaneous” means another transaction close enough in time to reflect current value.
The filing of current quarterly and annual financial reports is a requirement for inclusion in all of the following EXCEPT
Pink OTC Markets
Explanation:
Companies that are quoted in the Pink OTC Markets are not required to file financial reports with the SEC or other regulators. Current financial reports must be filed for inclusion in the OTCBB, and listing on Nasdaq or the NYSE.
To begin quoting a security on the OTCBB, a market maker must first register by filing a form with
FINRA
Explanation:
To begin quoting an OTCBB security, a market maker must first register by filing a Form 211 with FINRA OTC compliance.
When might a customer’s limit order not be required to be displayed
- If the customer requests the order not to be displayed
- If the customer’s size represents a de minimis change in the market maker’s size
- odd-lot orders
The purpose of the consolidated audit trail (CAT) system is to
help regulators track events in the trade life cycle.
Explanation:
The CAT system, created by Regulation NMS Rule 613, allows regulators to effectively and efficiently tack events in the life cycle of a trade, thereby enhancing regulatory oversight of US securities markets.
To meet FINRA’s standard for best execution, a member must buy or sell so that the price to the customer is
as favorable as possible under prevailing market conditions.
Explanation:
Performing reasonable due diligence to assure best execution means determining the best market for each customer order, making every effort to execute a market order fully and promptly, and buying or selling so that the price is as favorable as possible under prevailing market conditions.
A market maker offering an OTCBB equity at $0.25 must be firm on at least
2,500 shares Explanation: OTCBB quotes must be firm for a minimum number of shares depending on the price. The bid and ask side are evaluated independently to determine the minimum quote size. The minimum price and shares are as follows: 0.0001-0.0999: 10,000 shares 0.10-0.1999: 5,000 shares 0.20-0.5099: 2,500 shares 0.51-0.9999: 1,000 shares 1.00-174.99: 100 shares 175.00+: 1 share
Attributable quotes
Quote by known entity
Order tickets must note whether:
An order was entered as discretionary or unsolicited
A 1,000 share order, marked MDAY, is entered at 10:30 a.m. and 600 shares are filled at 1:15 p.m. If the other 400 shares are not filled, when will the order be returned to the entering party?
At 4:00 p.m.
Explanation:
MDAY orders are executable between 9:30 a.m. and 4:00 p.m. on the day the order is entered. They may be filled in part. But if there is an unfilled part, the order is returned at 4:00 p.m.
How long are OATS records maintained?
3 years
Stop quote orders
triggers is something other than execution
e.g. bid price, moving average
Order must be clearly explained
Cannot be referred to as stop order
- Stop quote order or stop bid order is ok
Trick to remember whether an investor hopes for a spread to widen or narrow:
debit has five letters and widen has five letters
credit has six letters, narrow has six letters
Flipping
an investor selling shares acquired in an IPO within 30 days of the offering date. The 30-day period is measured from the offering date regardless of when the purchaser was allocated or paid the shares
Broker-dealers Y and Z execute a trade in Stock X at a price unrelated to the current market for X. This transaction is reported
By the seller for regulatory transaction fee assessment purposes
Explanation:
If two parties enter a trade at a price substantially unrelated to the current market for the security, the executing party must report for regulatory transaction fee assessment purposes. This information will not be disseminated to the public.
enalty bids are designed to reduce selling pressures by assuring that syndicate members place shares with investors who
will hold their shares.
Explanation:
The penalty bid is assessed against a syndicate member who sells shares that are subsequently flipped by the investor.
A trade in an OTC equity takes place at 7:36 am. The trade is not reported until 9:03 am the same day. When is the trade report due, and what modifier should be included on the trade report?
8:15 am, .U
Explanation:
For OTC equity trades executed between midnight and before 8:00 am, the reporting requirement is by 8:15 am (within 15 minutes of system open on trade date). This trade is reported late so the modifier is .U (untimely). If it had been reported by 8:15, the modifier would be .T (timely).
Market Maker J intends to enter a stabilizing bid on Nasdaq. Which of the following statements are true?
A stabilizing bid must be available for all freely tradable outstanding securities of the same class being offered. Explanation: It is permissible to initiate stabilization in a security where there are no independent market makers quoting the stock. There may be only one stabilizing bid. MM J must notify Nasdaq if it intends to enter a stabilizing bid.
Adjustments to options contracts for splits and dividends are made to option contracts by
The OCC
Explanation:
When a corporate issuer determines that a contract adjustment such as a dividend or split is to be made, the OCC adjusts the option contracts to reflect the changes in value of the underlying stock and/or changes in the number of contracts.
Over what time period is an issuer’s ADTV calculated for purposes of staying within the safe harbor in connection with a share repurchase program
Four full calendar weeks
Explanation:
The look-back period for measuring ADTV is four full calendar weeks. To qualify, an issuer cannot repurchase per day more than 25% of the ADTV measured over this four-week period.
A pegged cap order to buy:
I is tied to the inside bid
II is tied to the inside ask
III becomes a market order once the specified price is reached
IV becomes a limit order once the specified price is reached
I and IV
A pegged order is pegged to the side of the market on which it is placed. A pegged order to buy is tied to the inside bid and dynamically moves as the inside bid moves; a pegged order to sell is pegged to the inside ask and dynamically moves as the inside ask moves. These are called “primary” peg orders. If a pegged order is also capped, then the order becomes a limit order once the order price moves to the “cap” price.
Under Nasdaq’s rule on clearly erroneous trades, what is used to determine if a trade is defined as clearly erroneous?
Reference price
Explanation:
Nasdaq’s rule for clearly erroneous trades in equity securities will lead to the cancellation of a trade if it is outside a certain range from the stock’s reference price. The reference price is typically the consolidated last sale immediately prior to the execution.
All of the following statements are true regarding the OTCBB EXCEPT:
foreign equity securities are not quoted
The OTCBB lists foreign equity securities, as well as ADRs on foreign equity securities. There are no listing standards, but the issuer must be current in its SEC filings. Quotes posted can be firm or unfirm; a priced quote is “firm;” an unpriced quote is “unfirm.” Note that if a price is quoted, then it is firm. Finally, quotes for DPPs (Direct Participation Programs, which are very thinly traded tax-shelter vehicles), whether priced or not, are always “unfirm” and are open for negotiation.
Limit on open order
Order seeking to purchase shares at the open and receive a specific price or better
Can Pegged orders on NASDAQ have a price cap?
yes
Put spread is:
- bearish when it’s a debit spread (when the investor purchases a put contract with a higher strike price and sells a put contract with a lower strike price)
- bullish when it’s a credit spread (when the investor purchases a put contract with a lower strike price and sells a put contract with a higher strike price)
Broker-dealer V is planning to place a penalty bid in the market for Issuer O, an OTC Equity Security. BD V must
Notify FINRA prior to the publication of the penalty bid
Explanation:
A broker-dealer must notify FINRA prior to the placement of a penalty bid or engaging in a syndicate covering transaction in an OTC Equity Security
A trade in an OTC Equity security is executed at 9:45 AM and is cancelled 12 hours later. The broker-dealer must report the cancellation
By 8:00 PM the following business day
Explanation:
If the trade was executed during regular market hours and cancelled after 8:00 PM the same day, the cancellation report must be submitted by 8:00 PM the next business day.
OTCBB quotes must be firm for a minimum number of shares depending on the price. The bid and ask side are evaluated independently to determine the minimum quote size. The minimum price and shares are…
- 0001-0.0999: 10,000 shares
- 10-0.1999: 5,000 shares
- 20-0.5099: 2,500 shares
- 51-0.9999: 1,000 shares
- 00-174.99: 100 shares
- 00+: 1 share
When a penny stock disclosure is required, it must be delivered to the client when?
At least two business days before the transaction.
Explanation:
The two-day prior delivery requirement creates a kind of “cooling off” period, during which the client can consider whether the transaction makes sense.
If a short sale price test restriction is triggered on Friday at 2 pm, until when will the price restrictions apply?
until Monday at 4 pm
Explanation:
Once triggered, the short sale price test restriction of Rule 201 applies for the remainder of that day and the next trading day. Thus, if the Rule 201 circuit breaker is triggered on a Friday, the price test restriction will be in effect on that Friday and on the following Monday. The bid-test restriction is triggered when a stock is down 10%.
A Nasdaq listed option trades for $8.90 at a time when the last sale price is $8.75 and the theoretical price is $8.20 Under the Nasdaq obvious error rule, what will be the final price of the trade?
$8.50
Explanation:
Under the Nasdaq obvious error rule, Nasdaq will adjust a trade if it is a more than a defined amount away from the theoretical price. For options with a theoretical price between $5.01 and $10.00, the band is $0.50. Since this trade occurs outside that $0.50 range, it is an obvious error. For options with a theoretical price above $3.00, the price will be adjusted to $0.30 away from the theoretical price - $8.50.
VIX index relation to the market
Inverse
A broker-dealer has received a customer order to purchase 7,500 shares of ABC at 21. If later that day the BD buys 10,000 shares of ABC for itself at 20.50, the BD
Is required to execute the customer order at 20.50 within 60 seconds.
Explanation:
According to industry regulations, if a broker-dealer receives a customer order and proceeds to execute a transaction for its own account in the same security, it must immediately thereafter (within 60 seconds) execute the customer order, based on the same terms as the firm’s execution.
SEC filing requirement for OTC Pink
Not required
Broker D is an ADF Trading Center. If it wishes to deny a broker-dealer that is not a Trading Center direct electronic access, how much prior notice must it give to FINRA?
14 calendar days
Explanation:
The Trading Center must give prior notice of at least 14 calendar days to FINRA Market Operations before denying a broker-dealer direct electronic access.
closing price
established by closing cross
Gerald places an order to buy 1000 shares of an OTC equity from his market maker firm. The firm’s current quote is $4.24 - $4.30 3 x 5, and executes Gerald’s order upon receipt. Does the firm need to update its quote?
No, because the order was executed upon receipt.
Explanation:
The general rule requires firms display customer limit orders, but there are a variety of exceptions when an order does not need to be displayed. The rule excepts any customer limit order that is: executed upon receipt of the order; placed by a customer who expressly requests that the order not be displayed; an odd-lot order; a block size order; delivered immediately upon receipt to a national securities exchange or an ECN that widely disseminates such order; delivered immediately upon receipt to another OTC Market Maker that displays the order; or an all-or-none order. Because Gerald’s order was executed upon receipt, the firm does not need to update its quote.
Which orders can be accepted for the opening rotation?
I Market order
II Limit Order
III Straddle order
IV Spread order
I and II
At the opening rotation, each option series trades alone for a brief time period to fill any orders for that series in an “orderly” fashion. When all of the series have been “rotated through,” trading starts in all series. A spread or straddle order requires that 2 series be traded at the same time to create the position - this is an impossibility if only one series is trading at the time. Any order for a single series (buy, sell, buy limit, sell limit) can be filled at the opening (or closing) rotation.
Under FINRA rules, all of the following information must be recorded on an order ticket EXCEPT:
payment for order flow
Payment for order flow information, if such a payment was made, is required on customer confirmations. It is not required on order tickets. Order tickets must have the time of execution stamped on the ticket. If the order is a sale, the ticket must be marked long or short. Finally, the ticket must be marked “solicited” or “unsolicited,” showing how the order was received.
Which of the following items will not be found on an order memorandum (Ticket)?
Transfer Agent ID Number
Explanation:
An order ticket will not contain any information about the transfer agent.
Closing cross
Process by which trading ends
Auction
A trader who engages in the violation of quote-stuffing is trying to use high-frequency trading for the purpose of
overwhelming the market with orders and slowing down execution, to gain a price advantage.
Explanation:
Quote stuffing is a prohibited practice in which algorithmic traders enter and then quickly withdraw large orders to create confusing or slow market execution, so as to gain a price advantage.
For OTC equity securities, market makers and broker-dealers must review information about the issuer whenever they
Initiate or resume OTC quotes
Explanation:
Market makers and broker-dealers must review information about the issuer when they first publish, or resume publishing, OTC quotes for specific securities unless a 15c2-11 exemption applies (e.g. piggybacking).
Where are OTC Pink and OTC BB trades reported?
OTC Reporting Facility (ORF)
Good till cancel
Stop order can activate and execute on different days
Unless otherwise specified, orders are only for that day
What happens during an LULD trading halt if no reopening price is reported by the primary exchange?
All trading centers may resume trading after 10 minutes
Explanation:
If the primary market does not report a reopening price within 10 minutes, all trading centers may resume trading the stock.
In a principal transaction, a market maker buys 500 shares of ABCD from a customer at 49.75, which includes a mark-down of 10 cents per share. Which statement is TRUE about the report for this trade made to the TRF for NASDAQ?
500 shares are reported at 49.85
Trade reports exclude mark-ups, mark-downs, commissions, or any other charges. The firm bought the stock from the customer at 49.75, inclusive of a .10 mark-down. The price to be reported is thus 49.85.
Broker-dealer G operates several market centers that are required to post monthly data on execution quality. G must maintain an Internet site that includes
A list of links where files can be downloaded for all market centers
Explanation:
For each participant, the SEC wants investors to be able to access the downloadable files on execution quality from a central Internet page, containing a list of links to files for all market centers. The files themselves can be located on separate Internet sites or pages. This is a requirement under Reg NMS Rule 605.
For FINRA to consider a trade clearly erroneous under the numerical guidelines, it must trade
outside the percentage band.
Explanation:
The percentage band sets both a floor and ceiling price which are symmetrical around the Reference Price. A trade must be outside the band to be a candidate for a clearly-erroneous designation by FINRA.
Under TRF (Trade Reporting Facility) for NASDAQ rules, all of the following transactions are exempt for last sale reporting purposes EXCEPT:
A the purchase of shares of a registered offering at the Public Offering Price
B the purchase of shares of an unregistered offering under Regulation D
C dual agency trades
D trades resulting from the exercise of listed options
The best answer is C.
Not reported to the TRF for last sale purposes are:
- Odd lots;
- Trades where the buyer and seller have negotiated a price that is unrelated to the current market price (e.g., to enable the seller to make a gift and value the securities for gift tax purposes);
- Trades resulting from exercise of listed option (note, however, that the exercise of OTC options must be reported);
- Private placements of unregistered shares of companies (Regulation D is the federal private placement exemption) listed on NASDAQ (note, however, that trades of 144A issues - blocks of private placements that can be traded between Qualified Institutional Buyers - must be reported);
- Initial sales of IPOs at the Public Offering Price (only trades in the secondary market following the closing of the books on the deal are reported); and
- Trades reported through other NASDAQ or exchange systems.
Dual agency trades (agency crosses) must be reported to the tape, with the tape report only showing 1-side of the trade. In addition, a non-tape report is required naming any parties to the trade that are not included in the tape report. Finally, remember that FINRA can require regulatory (non-tape) reports for any of these transactions - and usually does so that it can assess fees on them.
All of the following statements are true regarding cabinet trades EXCEPT:
A Cabinet trades are effected by Market Makers
B Cabinet trades are treated in the same manner as “off the floor” trades
C Cabinet trades are effected at a premium of $.01 per share
D Cabinet trades may be placed for customer, firm, or Market Maker accounts
The best answer is A.
A “cabinet” trade is a closing trade for a worthless contract at a premium of $.01 per share ($1 aggregate premium per contract). These are handled by Order Book Officials or Specialists/DMMs as an “accommodation” to give customers a closing trade confirmation. Cabinet trades can be placed with the Order Book Official by customers, member firms, and Market Makers. These are treated like an “off floor” trade because there is no reporting in real time of the trade to the tape. These transactions are reported at the end of the day.
Securities Exchange Act of 1934 prohibited manipulation activities
Matching / Painting the tape
Inducements (stock touting, tipster sheets)
False statements
Layering
- Practice of entering lots of limit orders to obtain better execution on the other side of the market
Spoofing
- Entering orders to entice other participants to trade at prices higher or lower than the true market price
Price fixing
Prearranged trading between 2 firms
Collusion between 2 firms
Interpositioning a third party in a trade
- Permitted if it leads to better price for customer
Insider trading
- Firms can accept unsolicited orders while in possession of material, non-public information
Front running a block transaction
Marking the open
Marking the close
Permitted quotes for OTCBB
Firm (for priced quote)
2-sided
1-sided
Unpriced indications
Under NASDAQ SCAN order routing procedures, if a customer limit order cannot be completely filled in the NASDAQ System, the unfilled portion of the order is:
routed to other market venues that trade that issue and if it is not filled, it is returned and placed on the book
NASDAQ offers choices of routing algorithms that can be used for filling of orders in the NASDAQ System. The main ones used are:
- SCAN: First attempts to execute the order against the NASDAQ System at a price equal to, or better than NBBO. If the order cannot be filled at the best price, it is routed to the better-priced market (e.g., an ECN, third market maker or another exchange). If the order is not completely filled in the better-priced market, the unexecuted portion posts to the System. If the order is subsequently locked or crossed by another market, it will not route to that market.
- STGY: Behaves the same as SCAN, except if the order is subsequently locked or crossed by another market, it will route to that market.
Because exchanges now pay for orders, the more orders that are executed on a single market, the greater the payment that the order entry firm will get. With SCAN routing, orders posted to the System after attempting a fill in another market are “passive” - they wait there for another market to access that order in the System under the rule. This means the order will be filled on NASDAQ, maximizing the order entry firm’s payments for order flow received from NASDAQ. With STGY, the unfilled order on NASDAQ’s book will be routed to the other market, so an order entry firm that does not have sufficient order flow to receive payments for order flow might choose this option.
Imbalance-only
Late orders (basically a limit order with lower priority)
- limit orders that are repriced to the inside market
- designed to balance the cross
- not guaranteed execution
An investor has an open order to sell 300 shares of ABC for $75.25 limit. If the stock subsequently goes ex-dividend for $0.162, what will be the resulting order price of the limit order?
$75.25
Explanation:
Open orders below the current market price are adjusted downward by the amount of the dividend prior to the open of trading on the ex-dividend date. For dividends in fractional cents, the order is further rounded down to the nearest whole cent. Open orders above the current market price are not adjusted. Sell limit orders are above the current market price and therefore are not adjusted for dividends.
How often are broker-dealers required to report to FINRA their total short positions in all customer and proprietary accounts?
Twice per month
Explanation:
The filings are made via the online Regulation Filing Applications (RFA) system. A mid-month filing is due on the 15th of the month and a month-end filing is due by the last business day of the month on which transactions settle.
Describe the main differences between quotes on equity securities on the Nasdaq System versus the OTCBB?
Quotes on the Nasdaq must be priced, two-sided, and firm, whereas OTCBB may be priced or unpriced and two-sided or one-sided.
Explanation:
Quotes on the OTCBB have much greater flexibility as compared to Nasdaq or the ADF. On the OTCBB, quotes can be two-sided, one-sided, or unpriced, whereas on Nasdaq all quotes must be priced, firm, and two-sided. However, if an OTCBB quote is priced, it must be firm.
All of the following orders can be accepted at the opening rotation EXCEPT:
A market order
B limit order
C spread order
D market if touched order
The best answer is C.
At the opening rotation, each series of option is traded alone for a brief period, followed sequentially by the next option in the series, etc., until the rotation is completed. Since all contracts are not being traded at the same time, it would be impossible to fill a spread or straddle order (since these orders require 2 different contracts to create the position, and only 1 contract is being traded at a time in the rotation).
When a short sale circuit breaker is triggered in Rule 201 for a covered security, how can short sale orders be executed?
Orders can only be executed at a price above the current national best bid unless the order is marked short exempt.
Customer limit orders are not exempt short exempt, regardless of when they were entered.
Which of the following is true regarding IPO share allocation reports?
Reports are provided to the issuer.
Explanation:
FINRA Rule 5131 requires the lead manager to provide the issuer with regular reports of indications of interest including the names of institutional investors and the number of shares indicated by each along with aggregate retail demand. After settlement, a final report with similar information must also be provided. Reports are submitted to the issuer’s pricing committee or, in the absence of one, to the board of directors.
The stock of a bank can be quoted on the OTCBB, even if the issuer does not file with the SEC, provided that it…
…Is current in its filings with banking regulators
Explanation:
Bank stocks can be quoted on OTCBB if the bank is current in filings with the appropriate banking regulator.
Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose all of the following information EXCEPT:
A quoted spreads
B speed of executions
C rates of price improvement
D fill rates
The best answer is A.
SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on:
Effective spreads;
How market orders of various sizes were executed relative to the public quote;
Speed of execution;
Fill rates; and
Price improvement or disimprovement.
Quoted spreads are often much wider than effective spreads, since most trading occurs within the quoted spread. Thus, effective spreads are included in the report - not quoted spreads.
T.2
indicates that the news announcement has been made
Reg M Rule 101
Restricts activities on distribution participants during new offerings of securities as they participate as market makers and underwriters at the same time
Prohibition on bidding, purchasing, or attempting to induce others to bid or purchase covered securities during restricted time period
You can’t drive up the price of the stock!!!
Step out
broker transfers position to another broker, not actual trade
IPO Timeline
Underwrite sells to investor at IPO price, taking into account:
- Financial analysis (cash flow, revenue, expenses)
- Market enthusiasm
Trading begins in secondary market on effective date after the market opens
- Initial trade must be on primary listing place
- Market makers can register and immediately begin quote an IPO after the opening cross
During which time of a trading day is speculation or manipulation likely to drive large swings in stock prices?
4 to 6 p.m.
Explanation:
Prices can change dramatically right after the close of regular market hours, as after-market trading begins. Rapid price change can be driven by speculation or manipulation, especially if news is announced right after regular market hours.
How many Nasdaq-listed options of the same class must be quoted “no bid” for at least five seconds before execution to trigger an “obvious error?”
Two
Explanation:
It takes at least two options of the same class quoted “no bid” to trigger an obvious error. One is the option in which the trade took place. The other must be one strike price below (for calls) or one strike price above (for puts).
What type of notice must be given to FINRA by a syndicate that imposes a penalty bid on an offering involving OTC equities?
Prior notice and confirmation notice
Explanation:
Prior notice must be given before the penalty bid. The confirmation notice must be provided within one business day of completion.
Order protection rule
Prohibits trade-throughts
Under SEC Rule 15c2-11, in order to be eligible for the piggybacking exemption the security cannot have had a gap of more than how many days without a quote?
four days
Explanation:
Piggybacking allows a market maker to initiate quotes in an OTC equity without filing Form 211 provided that quotes have appeared for the security on at least 12 of the last 30 trading days and provided that there has been no more than four business days in a row without a quote during that period.
Nasdaq market makers must be open for business during normal business hours from
9:30 a.m. to 4 p.m.
Explanation:
During normal business hours on all business days - 9:30 to 4 p.m. - market makers must maintain two-sided quotes and abide by Nasdaq rules.
What level of NASDAQ service do market makers use?
Level 3
Prime broker
performs a suite of services on behalf of hedge funds and other large institutions
One exception to the order protection rule is allowed for trades executed for the account of a customer, with a guarantee of execution at no worse than an agreed price. This is known as
A stopped order
Explanation:
Stopped orders are an exception to the order protection rule - but only if the customer agrees. The stopped price must be set on an order-by-order basis. In a stop stock trade, the price is guarantees on a customer’s order for a short period of time.
NMS Access Rule
- It prohibits trading centers from unfairly discriminating against private connectivity providers in ways that inhibit access.
- It limits fees that trading centers may charge for access to no more than $0.003 per share for stocks quoted at $1 or more. For quotes below $1, the
limit is 0.3% of the quotation price.
Example
The offer to sell an NMS stock is displayed as $20 per share. The cost to access the offer may not exceed $0.003 per share. The offer to sell an NMS stock is displayed as $0.60 per share. The cost to
access the offer may not exceed $0.0018 per share (calculated as $0.60 × 0.003). - It requires self-regulatory organizations (SROs) to establish, maintain, and enforce written rules to prevent members from displaying automated quotes that lock or cross the protected quotes of other trading centers.
The Nasdaq closing cross begins at exactly 4 p.m. EST. It concludes
Five seconds later
Explanation:
The closing cross is brief, lasting just five seconds. It enables market participants to execute orders at a fully transparent closing price that reflects actual market activity.
Required information for reporting transactions
Stock symbol number of shares price time of execution action: buy, sell, short sell, cross Trade capacity: principal, agent, riskless principal, step-out, give-up
DOES NOT INCLUDE TRANSACTION FEE
Butterfly spread
Made of four options, all with the same expiration, but three with different strike prices
A two-option position could be a butterfly spread
A customer owns 100 shares of ABC stock and purchases 1 ABC Jan 50 Put @ $4 as a hedge. The market declines, and the customer wishes to exercise the put. ABC has declared a cash dividend that the customer wishes to receive. What is the first day that the customer can exercise the put and still receive the dividend?
“Ex” Date
If a customer exercises a stock option contract, settlement occurs “regular way” 2 business days after trade date. To receive a dividend, a customer must be on the record books on Record Date. The “ex” date is set by the exchange, based from the record date. This is the first date that any purchaser of the stock in a regular way trade will settle after the Record date, and, thus will not receive the dividend. Thus, to receive the dividend, the holder of a put must exercise on or after to the ex date, since exercise of a put results in a regular way sale of the stock. Exercise of the put prior to the ex date will result on settlement on or before the Record date, and the person who exercised would not be on record to receive the dividend.
At 3:10 p.m., Trader H enters an IO limit order to buy at $45.63. At what price will it execute?
At or below the 4 p.m. bid price
Explanation:
IO orders must be limit orders. But their limits are re-priced just before the Nasdaq opening and closing crosses. An IO buy order executes at or below the opening or closing bid price. IO sell orders execute at or above the closing ask price. The purpose of an IO order is to add liquidity to the crosses.
Where are NASDAQ/NASDAQ convertible bond trades reported
NASDAQ/FINRA TRF (trade reporting facility)
Market Maker C displays a manual quote in the ADF, so that it locks a previously disseminated quote. Unless the quote is promptly withdrawn the market maker must
Route an intermarket sweep order
Explanation:
If a member displays a manual quote that locks or crosses, the member must either promptly withdraw the quote or else route an intermarket sweep order to execute against the full displayed size of the locked or crossed quote.
Until when can American options be exercised?
5:30pm on the third Friday of the expiration month
out of the money options at this time will expire
When must excused Withdrawals for Quotation Notification be sent?
Typically one day in advance
For OATS purposes, a firm that does any of the following must record OATS reports, except
A firm that solicit orders
Explanation:
An Order Receiving Firm is a FINRA member that is subject to OATS reporting because it originates or receives an order instruction. The instruction may come from a customer, another firm, or a department of the same firm.
At 9:23 a.m. one morning, a broker recommends a stock to a customer. The customer calls back at 9:29 a.m. and agrees to the trade. The broker’s firm transmits the order for execution at 9:31 a.m. and the trade takes place at 9:34 a.m. The time of entry on this trade is
9:31 a.m.
Explanation:
The time of entry is defined as the time when the firm transmits the order or instruction for execution.
Under NASDAQ rules, the opening price quoted on NASDAQ for an IPO:
I must be reported to NASDAQ by the lead underwriter by 6:45 PM on the evening before trading
II must be reported to NASDAQ by the lead underwriter by 9:25 AM on the morning before trading
III will show the P.O.P as the opening bid
IV will show the P.O.P as the opening ask
I and III
The opening price quoted in NASDAQ for an IPO is the issuer’s Public Offering Price - shown as the first bid. NASDAQ requires the lead underwriter to call NASDAQ by 6:45 PM on the night before trading, so that NASDAQ can open the stock with the P.O.P. as the first bid. This is the baseline price against which NASDAQ builds the book of subsequent quotes and orders.
According to OATS, if an order is submitted at 4:30 p.m. on Friday, on which day must it be reported?
An ordered entered after the market closes on Friday will be captured on the Monday OATS report (Monday OATS reports include all orders from Friday 4:00:01 p.m. until Monday 4:00:00 p.m.). This OATS report would then be submitted on Tuesday by 8:00:00 a.m.
Stopped stock trade
Stopped stock trades do not update the last sale. Therefore, they can be executed outside LULD bands.
Stopped orders—a stopped order, sometimes called a stop stock transaction, is an order where a broker-dealer offers a customer a specific price for a transaction, along with the opportunity for the customer to find a better price elsewhere. The execution must be at a superior price to any protected quote in order to qualify for an exemption from the Trade-Through Rule. This is a different order from a traditional stop order.
When a broker dealer acts on an agency basis to help a customer complete trades, the firm normally is compensated through
Commissions
Explanation:
Acting as an agent, broker dealers normally charge commissions. Acting as principals, they mark up securities sold from their own inventory, or purchased and then sold.
Resting limit order
A limit order that cannot currently be filled
Who issues an escrow receipt?
Bank
The OCC accepts an “escrow receipt” for stock to cover short call positions or an escrow receipt for cash to cover short put positions. An escrow receipt is a receipt from a bank showing that the stock is being held on deposit by the bank and that the bank will deliver the shares if there is an exercise of the short call; or that it will deliver the cash if there is an exercise of a short put.
Trading halt in ADR
Foreign halt of underlying for public interest or new?
FINRA will halt domestic ADR
Foreign halt of underlying for regulatory reasons or filing deficiency?
No FINRA halt (maybe they’re okay in US regulations/filings)
VIX index options allow the investor to speculate what?
Investor sentiment and market volatility
Under SEC Rule 10b-10, must the difference between the reported trade price and the price to the customer be on the customer confirmation?
No
Under SEC Rule 10b-10, confirmation disclosure must include, among other things:
- Customer name and address;
- Firm name, address and telephone number;
- Name of security purchased;
- Size of trade and Price of trade;
- Trade date and Settlement date;
- If the trade is an agency trade, the commission must be disclosed. In addition, the time of the trade and the name of the contra-party to the trade must be made available to the customer on request;
- If the trade is a principal transaction, the mark-up is not disclosed except for principal transactions in NASDAQ stocks - note that a mark-up is defined as the difference between the reported transaction price and the price to the customer;
- If the market maker effecting the trade paid a fee to the introducing broker, this must be disclosed - this is known as “payment for order flow;”
- If the firm is a market maker in the security, this must be disclosed;
- If a control relationship exists between the member firm and the issuer of the security, this must be disclosed.
There is no requirement to disclose whether the order was solicited or unsolicited on the confirmation. On the other hand, this information is required to be recorded on the order ticket.
By following the provisions of SEC Rule 10b-18, an issuer is allowed a safe harbor for the purchase of its
Common Stock
Explanation:
The Rule 10b-18 safe harbor only applies to open market purchases by an issuer of its common stock. It does not apply to any other type of security even if related to the common stock, such as warrants, options, or single stock futures.
ABC stock is currently quoted 18.75-.90 with a last sale of 18.72. To repurchase shares under the Rule 10b-18 safe harbor, ABC could bid
$18.75 or lower.
Explanation:
Rule 10b-18 provides a safe harbor for issuers repurchasing their own stock. Under the rule, the maximum an issuer can bid is the greater of the highest current bid or last sale price.
Under the Securities Exchange Act of 1934, what is the max jail sentence and max fine?
The Securities Exchange Act of 1934 provides for maximum jail sentence of up to 20 years. Individual persons may be fined no more than $5 million if convicted of violations under the Act. Persons other than natural persons (corporations, partnerships, etc.) may be fined up to $25 million.
Reg SHO Rule 201 (the Alternative Uptick Rule)
Under Reg SHO Rule 201 (the Alternative Uptick Rule), if the price of an NMS stock declines 10% from the previous day’s closing price (in the security’s primary listing market), short sales will be subject to price restrictions. The only permissible short sales once price restrictions are triggered are those at a price above the national best bid (NBB). The price restriction lasts for the remainder of that trading day and the entire next trading day, subject to limited exceptions for arbitrage (hedging) and odd-lot transactions.
The three tests of a covered non-public company, for purposes of the anti-spinning rule, are designed to identify private companies that
have the potential to go public
Explanation:
The tests are income, shareholders’ equity and total assets/revenues. They are designed to identify companies large and substantial enough to go public. Officers and directors of these companies are subject to the spinning rule. Spinning prohibits a broker dealer for allocation IPO shares to these individuals in return for garning that company’s investment banking business.
An allocation of IPO shares to a corporate officer will not be subject to the anti-spinning rule if there is no condition that the officer will retain the member for what type of service?
Investment banking
Explanation:
The anti-spinning rule is designed to eliminate quid pro quo arrangements that link IPO allocations with investment banking services.
ABC Inc. Will pay a cash dividend of $0.522. An order to purchase 300 shares at $12.73 will be adjusted to
$12.20
Explanation:
When an issuer pays a cash dividend, the price of an order will be reduced by the amount of the dividend, rounded up to the nearest whole cent. An order to purchase 300 shares at $12.73 would be reduced by $.53 and the new order price will be $12.20.
For purposes of NMS stocks, the dollar size threshold that defines a block size trade is
At least $200,000
Explanation:
Block size with respect to an order in NMS securities means at least 10,000 shares or a quantity of stock having a market value of at least $200,000. Note for OTC securities a block is 10,000 shares and $100,000.
When must underwriter notify FINRA of the end of a restricted period
5 day stock: six days prior to pricing
1 day stock: 2 days prior to pricing (underwriter must provide trading data by close on pricing data)
Actively traded security: 1 day after pricing (Underwriter must provide trading data by close on pricing date)
Broker-dealer B is a market maker in the OTC Pink Market. The placement of a subject quote by BD B
Must be properly identified as a quote that is not firm
Explanation:
Quotes that are not to be understood as binding obligations on the firm that entered them must be clearly identified as such at the time the quote is published
NASDAQ MarketWatch has the authority to declare a clearly erroneous stock trade null and void on:
I its own motion
II the complaint of the buying dealer
III the complaint of the selling dealer
I, II, III
NASDAQ MarketWatch has the authority to declare an inter-dealer stock trade null and void; or can adjust the terms of the trade, given that the trade is clearly erroneous. It can do so on its own motion or at the request of either the buyer or the seller.
What is a clearly erroneous trade
For stocks greater than $50
- Normal hours: 3%
- Extended market hours: 6%
For stocks greater than $25.01 ~ $50
- Normal hours: 5%
- Extended market hours: 10%
For stocks greater than $0.00 ~ $25.00
- Normal hours: 10%
- Extended market hours: 20%
if it breaks the 52 week range, can apply, but might not be
To avoid further disclosure and self-identification requirements, a Large Trader must not exceed the aggregate discretionary share thresholds for what period of time?
A full calendar year
Explanation:
If a Large Trader has not had aggregate discretionary transactions exceeding thresholds at any time during the previous full calendar year, it may file for Inactive Status and be exempt from filing requirements, until thresholds are once again exceeded.
Under the Securities Exchange Act of 1934, the maximum penalty that can be levied against a corporate “tipper” for insider trading violations is:
$25,000,000
Insider trading violations are punishable by treble damages (pay back 3 times the profit achieved or loss avoided) for the tippee, plus pay a fine of up to $1,000,000; or go to jail for up to 20 years. For the “tipper” (and these are often the guys with the deep pockets, like an officer of a company who gave the information that resulted in the trade), the maximum fine is $25,000,000.
Harry is an accredited investor who purchases securities in a Regulation D private placement. The issuer of the securities does not report financial information to the SEC. How long must Harry hold the securities, at minimum, before they can be resold?
12 months
Explanation:
Most securities acquired through private placements are restricted or control securities. If they are issued by companies that report financial information to the SEC, they must be held at least six months. If no financial information is reported by the issuer, they must be held 12 months.
Which FINRA member is responsible for the complete and accurate submission of information into the Trade Reporting Facility?
Reporting Member
Explanation:
Unless the contra side has an opportunity to provide its own trade information, the Reporting Member is responsible for complete and accurate submission of information for both sides of the trade.
Rule 105—Short-Selling in Connection with a Public Offering
Rule 105 prohibits anyone from purchasing securities in a public offering if that person sold the same securities short within the five-business-day period preceding the pricing of the offered securities. The purpose of the rule is to prevent an investor from shorting a significant amount of stock just prior to the pricing of a follow-on offering and subsequently closing that short position by repurchasing the stock at the now depressed offer price. To do so is manipulative and a violation.
Regulation M Rule 105 restrictions on short sales and purchases during the restricted period apply to all investors. The rule does not apply to short sales
executed more than five business days before the pricing of the new issue.
Acting as principal, a dealer buys 100 shares from a customer at $28.45 per share, including a 10 cent mark-down from the prevailing market. The trade will be reported by the buying dealer as
100 shares at $28.55
Explanation:
In a principal trade, a mark-down by a buying dealer must be added back to the trade price. A mark-up by a selling dealer must be subtracted from the trade price.
A market maker has 2 limit orders to buy 500 shares of ABCD at 10.00. A market order to sell 400 shares is executed by the firm at 10.00, at which point the firm fills one of the two orders for 400 shares. Is this permitted?
This is permitted as long as the firm consistently applies a methodology for dealing with multiple limit orders
All firms that accept limit orders must have a methodology in place to deal with multiple limit orders at the same price. This firm can allocate the market order to sell against either of the customer limit orders to buy. Since the market order to sell 400 shares is less than either customer limit order to buy of 500 shares, the balance of the one partially filled order (100 shares) must be protected; as must the other unfilled 500 share order to buy at 10.00.
Partial Tender
An offer to buy some of the stock in a publicly-traded company for a price well above fair market value. The company making the tender offer specifies the maximum number of shares it will buy. As with other tender offers, it is not intended to stop trade on its stock. It may be part of a hostile takeover or, if a company is buying back its own stock, an attempt to keep a hostile takeover from happening.
Stabilizing bids may be entered:
I Above the Public Offering Price
II Below the Public Offering Price
III Below the Public Offering Price but above the current independent market
IV At the Public Offering Price
II and IV only
Under the SEC’s rules relating to stabilization, stabilizing bids may only be entered at or below the Public Offering Price, if no current independent bid exists for that issue. If a current independent bid exists, then a stabilizing bid can only be placed at or below this quote. For most new issues, there is no current independent bid because the NASDAQ screen is “blacked out” until the syndicate manager closes the syndicate books and notifies NASDAQ operations that the security is free to trade. When the screen is “turned on,” it opens showing the stabilizing bid placed by the manager. At that point, any other independent market makers may enter quotes.
A trade is executed after-hours, at 5:00 p.m. and then cancelled 30 minutes later. What is the deadline for reporting the cancellation?
By 8:00 p.m. that day
Explanation:
For trades executed outside normal market hours (9:30 to 4:00) and cancelled prior to 8:00 p.m. on the same day, the cancellation must be reported by 8:00 p.m. that day.
How many round lots must a market maker be prepared to trade?
1 round lot (100 shareds)
An OTC equity trade is made by a firm located in San Francisco for a client who lives in Chicago. The time of execution is shown on the trade report as 14:04:12:146. What time did the trade occur?
2:04 pm Eastern Time
Explanation:
On a trade report, the time of execution generally is expressed in hours, minutes, seconds and milliseconds based on Eastern Time in military format, unless another provision of FINRA rules requires that a different time be included. It doesn’t matter where the trade takes place or where the firm and client are located.
Subject quote
Quote subject to change, subject to confirmation
A market peg order to buy tracks the:
national best offer
Peg orders dynamically track the inside market - their price movements are “pegged” to the movements of the NBBO. A “market peg” order (a reverse peg order) is tied to the opposite side of the NBBO. Thus, a market peg order to buy is tied to the inside ask. A market peg order to sell is tied to the inside bid. A reverse peg order to buy is placed at the inside offer less at least $.01. This means that the pegged bid will be lower than the inside ask, so there will not be a lock or cross. A reverse peg order to sell is placed at the inside bid plus at least $.01. This means that the pegged ask will always be higher than the inside bid, so there will not be a lock or a cross.
Once a customer establishes an options position, the OCC reserves the right to change all of the following terms of the contract EXCEPT:
A Number of shares covered by the contract
B Number of contracts covering 100 shares each
C Exercise price of the contract
D Exercise style of the contract
The best answer is D.
Because listed option contracts are adjusted by the OCC for 2:1 and 4:1 stock splits, the number of contracts can be adjusted; the number of shares covered by each contract can be adjusted; and the strike price (exercise price) can be adjusted. The style of the contract (e.g., American or European) is not changed.
NOCP
NASDAQ Official Closing Price, disseminated at 4pm
The best bid/ask quote displayed for an OTC equity is $9.95-$9.99. How would a trader who wants to buy shares lock the market?
Bid $9.99
Explanation:
The only bid that will lock this market is the current ask - $9.99. A bid lower than this will not lock, and a bid higher will cross.
When is a riskless principal capacity indicator used to report a riskless principal transaction to FINRA?
When only one side of the trade is reported
Explanation:
If only one leg of a riskless principal transaction is reported by a dealer (because the other leg has been reported by another member), a riskless principal capacity indicator must be added to the non-tape, non-clearing report or a clearing-only report.
A customer holds 1 ABC Oct 60 Call contract. The market price of ABC is currently 66. ABC declares a 20% stock dividend., on the ex-date, the strike price:
is adjusted down to 50
When a company declares a stock dividend or a fractional stock split, the number of shares per contract is increased, and the strike price is reduced. So, 1 ABC Jan 60 Call where there is a 20% stock dividend is adjusted to 100 x 1.2 = 120 shares at $60/1.2 = $50 per share.
Decrementation
Decrementation means that upon an execution, an order is reduced by the amount of the execution. Example: 500-share order; 200 shares executed; decrementation to 300 shares now displayed.
FINRA Rule 6250
regulates how ADF trading centers must display and allow access to their quotes to the market at large
The regulation that addresses potential conflicts of interest when issuers purchase their own stock is
The Securities Exchange Act of 1934
Explanation:
The Securities Exchange Act of 1934 addresses fraud and misrepresentation in secondary market transactions. It also regulates the representatives and firms that engage in securities transactions. Issuers purchasing their own stock in secondary market transactions are subject to the provisions of the Securities Exchange Act of 1934.
Regulation M restricted periods
- For smallest companies: restricted period begins 5 business days before pricing
- For medium sized companies: Begins 1 business day before pricing. These are companies that have an ADTV of at least $100,000 and a public float of at least $25 million
- Large companies (actively traded companies): No restricted period. Actively traded = ADTV of $1 million and a public float of at least $150 million
KG Securities is an OTC market maker that displays priced quotations in OTC equity securities in an inter-dealer quotation system on a regular basis for its proprietary account and its customer accounts. Which of the follow criteria is not relevant to determine if KG Securities must update the size of its published its quotes?
The customer’s limit price as compared to the NBBO of the quote across all inter-dealer quotation systems
Explanation:
When determining whether to update its quotes an OTC market maker does not consider the National Best Bid Offer (NBBO), but rather looks to the best bid and office on the specific quotation system where its quotes are posted. FINRA Rule 6460 requires OTC Market Makers that display priced quotations in an inter-dealer quotation system to immediately display the full size of any customer limit order held by the OTC Market Maker that (1) is priced equal to the bid or offer of the Market Maker; and (2) is priced equal to the BBO of the inter-dealer quotation system in which the OTC Market Maker is quoting; and (3) represents more than a de minimis change (10% of the size) in relation to the size associated with the OTC Market Maker’s bid or offer.
How are issuer-directed shares awarded, for purposes of the lock-up provisions?
Through directed share programs.
Explanation:
Any lock-up agreement on share transfers by officers/directors must apply to issuer-directed shares. These IPOs shares are awarded through directed share programs to people chosen by the issuer.
Under SEC Rule 15c2-11, a market maker seeking to initiate quotes is not required to file due diligence regarding the SEC in which of the following circumstances?
The stock in question had traded on an exchange on the previous day, though the market maker did not quote it.
Explanation:
Under Rule 15c2-11, market makers seeking to initiate quotes in an OTC equity must file Form 211 along with due diligence at least three days prior to resuming quotes. Due diligence can be satisfied with a prospectus, offering circular, 10k, or equivalent information. There are three exceptions, allowing a market maker to quote without submitting this documentation: unsolicited customer orders, securities that traded on an exchange on that day or the previous day, and piggybacking (i.e. the security satisfied a frequency of quotation test).
MPID for passive market making or stabilization
Must be primary MPID
All of the following statements about the Insider Trading and Securities Fraud Enforcement Act of 1988 are correct EXCEPT
It prohibits insiders from taking short swing profits
Explanation:
The Securities Exchange Act of 1934 prohibits insiders profiting from short swing transactions (purchases and sales within a 6 month period).
FINRA 5% policy
mark up/commission should be fair and reasonable (not necessarily 5%)
applies to agency and principal trades
NMS & OTC equities
does not apply to investment advisory fees
Who publishes OTC threshold securities
FINRA
Under Regulation M, the maximum restricted period for trading a subject security by a syndicate member that is NOT a market maker is:
5 days
During the cooling off period for “add-on” offerings, Regulation M places restrictions on syndicate members that are not market makers from trading that issuer’s securities. The idea is that the syndicate members will not attempt to bid up the price of the issuer’s outstanding shares, in order to be able to raise the POP of the additional issue. The rule states that:
- If the security is actively traded (average daily trading volume of $1,000,000 or more and public float of at least $150,000,000), there are no restrictions placed on market makers trading the issue prior to the distribution. The idea here is that this issue is too big for the price to be manipulated. This is called a “Tier 1” issue.
- If the security has an average daily trading volume of $100,000 and a public float of at least $25,000,000, the restricted period is the business day prior to the effective date. This is called a “Tier 2” issue.
Any other security not meeting these minimums is a “Tier 3” issue and is subject to a restricted period of 5 business days prior to the effective date.
On Monday March 12, a broker-dealer executes a stock short sale for a customer. However, the stock is not delivered by regular way settlement. The failed position is not closed until March 20. What is the duration of the restricted period during which the firm’s ability to sell short will be limited.
March 15-20
Explanation:
The restricted period begins on the day the fail-to-deliver must be closed, which is normally T+3 for stocks (the day after settlement). It continues until the failed position has been closed. March 15 is within the restricted period because the fail must be closed by the open of trading on that date or else the restriction begins.
Net transaction/net basis trade/net trade
A net transaction, also called a net basis trade, is a principal trade in which there is virtually no risk to the dealer. The term is defined by FINRA Rule 2124 as
“a transaction in which a market maker, after having received an order to buy an equity security, purchases the equity security at one price from a broker-dealer or
another customer and then sells to the customer at a different price.”
How to notify public with disclosure of information?
Press release, 8k (to release newsworthy information), social media, company website
When does the Manning Rule prohibit or restrict proprietary trading, while holding customer limit orders?
At all times the firm allows processing of limit orders
Explanation:
Members may limit the life of a customer limit order to normal market hours. If the firm allows processing of limit orders outside normal market hours the rule applies to these orders at all times.
For index options, the Large Trader threshold is based on
Fair market value only
Explanation:
For determining whether aggregate discretionary trading in index options exceeds the threshold, trading volume does not need to be calculated - only the fair market value of the options.
What are the penalties for insider trading and securities fraud exist for both civil and criminal violations?
Civil penalties may equal up to three times the profits made or losses avoided. Criminal penalties include a maximum $5 million fine and 20 years in prison. Both tippers who share inside information, and tippees who may act on it, can be held liable. The SEC encourages the reporting of potential insider trading violations and offers a bounty to informants.
Issuer W is a NYSE listed stock and has been halted by the NYSE. Broker-dealer P wishes to place a buy order for W on Nasdaq. Broker-dealer P
Must wait until W resumes trading on the NYSE
Explanation:
During a trading halt, new orders for a NYSE listed stock cannot be entered on Nasdaq until the security re-opens for trading on the NYSE (or the appropriate primary market for the security).
If a member holds interest in a joint account, detailed information about the account and its ownership must be provided to
FINRA
Explanation:
Information that must be reported to FINRA includes names of all joint account participants, their interests, and the purpose of the account.
Locate
Introducing firm (firm selling short) must locate shares to sell Can't contact prime broker is not a valid excuse
Trades of NASDAQ securities executed on an unlinked ECN are reported by:
TRACS
Most ECNs are now linked into the NASDAQ System and show their orders there, with resulting trades reported through the TRF (Trade Reporting Facility). Trades of NASDAQ securities executed by unlinked ECNs (an example is the Lava ECN) show their quotes in the ADF - the Alternate Display Facility - and their trades are reported through TRACS - the Trade Reporting and Comparison Service.
If a market is deemed to be “FAST” by 2 Floor Officials, entry of which of the following orders may be restricted?
I Market
II Market If Touched
III Stop Limit
IV Stop
II, III, IV
If a market is deemed to be “Fast,” Floor Officials may restrict the entry of stop orders, stop-limit orders, and market-if-touched orders. During trading, if these orders happen to be “bunched” at a specific price, and a trade occurs at that price, then they are triggered, and a flood of new market orders to either buy or sell could enter the market, worsening the situation. This is why entry of these orders would be restricted until the market calms down.
A trader who executes transactions that involve no change in beneficial ownership is involved in
wash sales
Explanation:
Prohibited methods for creating a false appearance include: executing transactions that involve no change in beneficial ownership and entering orders with knowledge that offsetting orders will be made by others. These are often referred to as wash orders.
What are the risks required to be included in an Extended Hours Trading Risk Disclosure document?
Retail investors generally should be discouraged from extended-hours trading due to the higher risk and greater potential for unfavorable trade execution. The disclosure must cover six specific types of risk, but that securities may lose value is not a part of the extended hours risk document; though that may be disclosed in other brokerage documents.
XYZ common stock, an S&P 500 component, is currently trading 103-104 with a reference price of 100. At 2pm an order is entered to buy 300 shares at 108. Entry of this order will cause XYZ stock to enter a
limit state
Explanation:
When an order comes in that is aggressively priced outside the LULD band (i.e. bid above the upper end or offered below the lower band), Nasdaq will price slide the order to the band. In this case, the 108 bid would be priced down to 105, which is the upper end up the LULD range (100 + 5%). The stock would then enter a 15-second limit state.
Trades executed at the opening cross are reported with:
All trades executed at the Opening Cross are reported with a .T modifier, since the cross technically takes place just before the market opens at 9:30:00 AM ET. Note that .T is used to report a trade made outside of regular market hours, but that is being reported that day. The .O modifier stands for price override - indicating that the trade has been reported within the required 10 seconds, but the market has moved away from the reported trade price. The .N modifier stands for next day settlement, as opposed to the trade settling regular way (T + 2).
Company D is as an affiliate of a Large Trader that exercises investment discretion over trades in NMS securities. As a Securities Affiliate, how are the discretionary trades of Company D counted in terms of the Large Trader’s 13H trading volume?
Counted towards the Large Trader’s 13H trading volume
Explanation:
The term Securities Affiliate means an affiliate of a Large Trader that exercises investment discretion over NMS securities. These trades are included in the Large Trader’s trading volume.
Jim, an investor, calls his broker, ABC Securities, to execute a short sale. The trade then is executed by XYZ Securities and cleared through Clearing Inc. The responsibility for making sure the shorted stock can be located belongs to
ABC Securities.
Explanation:
In a short sale, it is the introducing (or receiving) broker-dealer’s obligation to obtain a locate. The executing and clearing firms are not responsible.
An OATS report includes all of the following EXCEPT:
aggregated orders
OATS stands for the Order Audit Trail System, and is FINRA’s electronic record of all orders entered for NYSE, NASDAQ, OTCBB and Pink Sheet issues. This data is used for matching the order data to the actual trade that results through the ACT system. Reports into OATS are made on an order-by-order basis - they cannot be aggregated. In contrast, trade reports through ACT can be aggregated. The OATS information must include, among other things, date and time of order receipt; the contra-party; order identifier; terms of the order; time in force; where the order was routed for execution; and execution price. OATS data is entered at the end of each day, and is matched to the ACT reports that were made throughout that trading day.
Not held order
Price/time is left open to the registered rep
NOT discretionary order
An order is received on the equity trading desk at 6 PM Tuesday. The OATS report detailing this order must be submitted by
8:00 a.m. Thursday
Explanation:
The OATS report must be submitted by 8 a.m. on the calendar day following the end of the OATS business day. The OATS business day runs from 4:00:01 p.m. on one market day and ends at 4:00:00 p.m. on the next market day.
In deciding whether to impose an extraordinary event trading/quote halt in an OTC equity, FINRA considers whether there has been what type of impact on the market for a security?
Material negative
Explanation:
One example of a material negative impact could be the sudden death of a CEO. In this case, FINRA would likely institute a halt.
Information collected pursuant to SEC Rule 15c2-11 must be filed with FINRA pursuant to FINRA Rule 6432
At least three business days prior to publishing or displaying a quote.
Explanation:
Form 211 must be filed with FINRA at least three business days prior to publishing or initiating a quotation.
Not held orders
Permit floor brokers to decide time/price at which to to execute a customer’s orders.
All orders given to floor brokers are not held orders unless otherwise specified
A journalist who worked for a business magazine learns about the confidential takeover of a company he is writing about while performing his work duties. As a result, he buys a large amount of stock in the company, but then learns that the takeover will not take place and subsequently sells the stock position and ultimately breaks even on the transactions. In this situation
the journalist may have committed an insider trading violation under the misappropriation theory
Explanation:
In this case the journalist is not an insider of the company targeted for takeover. However, under the misappropriation theory, employees have fiduciary responsibility toward, and cannot misuse, confidential information about other companies entrusted to them by their employer. In this case the journalist most likely violated the misappropriation theory.
Halt cross
What name is given to a Nasdaq process for determining the price at which trades will execute, when a security is re-opened?
A halt cross increases transparency by disseminating timely information to investors on imbalances and the resumption of trading, after halts.
A clearing broker is reviewing, on line, two trades entered by correspondent firms. One exceeds the single trade limit, while the second is a 200 share trade. Under NASDAQ rules, the clearing broker must approve or decline the trade within:
15 minutes
For trades which exceed the single trade limit (currently $1,000,000), the clearing broker has 15 minutes to accept or decline the transaction.
During what time of day may a Supplemental Order be executed?
Regular market hours
Explanation:
Supplemental Orders that have been designated as eligible for routing are executed between 9:30 a.m. and 4 p.m. (in the regular trading session). Supplemental orders are used to provide additional liquidity and receive the lowest execution priority.
Layering
Entering limit orders with the intention of moving the market to obtain a beneficial execution on the other side of the market
Broker-dealer E is a large trader that files disclosure information with the SEC. When will it file its Form 13H?
Annually
Explanation:
The 13H filing for broker dealers is annual. The Form 13H is due within 45 days after the calendar year end.
What is a pegged order
A type of limit order that automatically adjusts as the market moves
Trader G enters a Price-to-Comply sell order to sell 500 shares. The inside bid/offer is $49.82/$49.85. At what price will the price-to-comply sell order be displayed?
$49.83
Explanation:
To avoid locking the market, sell Price-to-Comply orders are priced at the inside bid and displayed one tick higher than the inside bid. Since the inside bid is $49.82, one tick higher is $49.83. Buy Price-to-Comply orders are the opposite - priced at the inside ask and displayed one tick lower.
What must registered rep disclose when a penny stock trade is solicited?
- current quote
- compensation to be received by the rep and firm
NOT disclosed: number of market makers for the security
For fixed-income obligations, how do WI transactions trade?
Plus accrued interest.
Explanation:
WI fixed-income transactions trade plus accrued interest and with all due and past due coupons detached. Accrued interest is calculated on the expired portion of the current coupon at settlement.
A Qualified Block Positioner is a broker-dealer who executes orders with a current market value of
$200,000
Explanation:
A Qualified Block Positioner is a broker-dealer who executes orders with a current market value of $200,000 or more in a single trade, or in several trades at approximately the same time
Existing quote pricing requirements for Market Makers
9.5% (so a set quote can “drift” up to 9.5% from inside market before it needs to be updated)
Patsy is a director of ABC Corp., a public company, and she holds 10,000 shares of its stock. The current stock price is $40. If she plans to sell 2,000 shares during the next three months, is she required to file a proposed notice of sale with the SEC?
Affiliates must file Form 144 with the SEC if a proposed sale of control stock exceeds either 5,000 shares or an aggregate dollar amount of $50,000 in any three-month period. Selling her 2,000 shares at the current stock price would create an aggregate sale of $80,000, which is over the limit.
Under SEC rules, issuers are prohibited from:
selling calls on their own stock
Under SEC and CBOE rules, issuers are prohibited from selling calls against their own stock.
The SEC might impose a trading halt in a company’s stock for each of the following reasons except
pending news about the company that can materially impact the stock price
Explanation:
The SEC can halt trading in a stock when the Commission is of the opinion that a suspension is required to protect investors and the public interest. This can arise if a company’s SEC filings are late, inaccurate, or incomplete, or if the SEC has concerns about a stock’s trading pattern, such as Questions about trading in the stock, such as trading by insiders, potential market manipulation, or of the shares to clear and settle properly. For pending news, the exchanges themselves (NYSE or Nasdaq) would issue the trading halt, not the SEC.
On a broker dealer’s restricted list, which is a list of securities that its employees cannot trade, will there be an explanation why the security was added to/removed from the list?
No!
A broker-dealer’s watch list and restricted list should each include:
• the date and time the security was added to or deleted from the list;
• the name of a contact person who could answer questions about the addition or deletion.
What is an Accidental withdrawal?
Can it be excused?
How long to apply?
Market Maker takes itself out by accident
Can be excused (number of cases depend on number of names quoted)
Can get back in if apply within an hour
Painting the tape
Traders acting together to manipulate prices, often by creating artificial supply/demand
Could: inflate trading volume, manipulate price, or both
To what trades does NMS rule 606 apply
Includes only non-directed market orders and limit orders
Customers can request where their orders have been routed during the previous six months
Which of the following transactions is not subject to the securities industry’s fair-price standard?
Sales made by prospectus
Explanation:
A sale made by prospectus, at a stated public offering price, is not subject to the fair-price standard. It is subject to different rules.
A system that provides facilities for bringing together buyers and sellers of securities may be characterized as a (n)
Alternative trading system
Explanation:
This describes an alternative trading system. This is an entity that provides a market place for buyers and sellers of securities.
The 5-minute window between entry of quotes and the resumption of trading is shown by which trading halt code?
The best answer is T.3.
The trading halt indicators are:
T.1 - Trading is halted, news is pending
T.2 - Trading is halted, news is released
T.3 - Trading is halted, news is released, with 2 times showing; the time that quotes will resume, and the time that trading will resume, which is 5 minutes later. This is the “5-minute window.”
Which entity has the authority to reject orders routed to “away” trading centers, to mitigate risks associated with providing Nasdaq members with market access?
Nasdaq Execution Services
Explanation:
Nasdaq Execution Services (NES) is responsible for monitoring risks involved in market access. It can reject orders prior to routing or cancel orders that have been routed away.
NASDAQ system hours
4 am - 8 pm
If there is no National Best Bid/Offer on a stock, how is the market maker’s pricing obligation determined?
Based on the last reported sale
Explanation:
If there is no NBBO, the market maker’s pricing obligation is based on the last reported sale.
What is the universe of stocks that can become Threshold List securities?
Any that are required to file periodic reports with the SEC
Explanation:
The universe of potential Threshold List securities is very broad. It can include any equity that is required to file periodic SEC reports.
Reg M covered securities
Subject security
Reference security
So reg m applies to both convertible bond and the stock the bond can be converted into
On the basis of unexcused system outages, how long can a trading suspension last for an ADF Trading Center?
20 business days
Explanation:
A Trading Center can be suspended for 20 business days for issues with system outages. The suspension generally requires three unexcused outages within five business days.
Upon execution of a MMPO (Market Maker Peg Order), how is the order automatically renewed?
It’s not; The market maker must submit a new peg order.
A way for a market maker to refresh a quote at a price that is different (remember, reserve quote refreshes the quote at the same price) is with a “MMPO” - a Market Maker Peg Order. This is similar to a regular peg order, but is only to be used by market makers to maintain attributable quotes. The MMPO is a one-sided limit order that is priced based on a specified percentage variance from the NBBO. Once an MMPO is executed, there is no automatic renewal of the quote. If the size is decremented to less than 1 round lot, the MM can manually place another quote or can use reserve size to refresh the quote. Note that in this instance, NASDAQ does not automatically renew the quote - it is the MM’s obligation to do so.
When is there a loss with a debit call spread?
if both options expire
Rule 606 of Regulation NMS requires:
each broker-dealer to prepare quarterly reports on its routing of non-directed orders, including the 10 largest venues where orders were routed
Rule 606 requires member firms to prepare a quarterly report on the routing of their non-directed customer orders. The report, which is publicly available, details the percentage of customer orders that were “non-directed;” the identity of the 10 largest markets or market makers to whom non-directed orders were routed; and details the member firm’s relationship with that market maker (for example, many larger retail member firms own their own market maker subsidiaries to whom they route orders); and any arrangement for payment for order flow or profit-sharing.
Rule 605 of Regulation NMS requires market centers to make monthly electronic reports about the quality of execution in each stock traded, including how market orders of various sizes are executed relative to public quotes. The reports must also include information about effective spreads. In addition, market centers must provide reports on the extent to which they were able to “improve” execution prices for limit orders as compared to the public quote at that time. Do not confuse Rule 606 with Rule 605.
Primary peg
tracks same side of the market
can include offset
Basically matches NBBO (up to cap)
Opening Cross
Process by which trading begins
Auction
All of the following statements are true regarding securities that trade on the Pink OTC Markets EXCEPT
the issuing companies that are included have been verified as valid companies by the National Quotations Bureau.
Explanation:
Companies that are quoted in the Pink OTC Markets are not verified prior to inclusion and are considered very risky. Stocks on the Pink OTC Markets or OTCBB that are worth less than $5 are typically referred to as penny stocks. These stocks are traded infrequently and may have substantial liquidity risk. Quotes are available electronically through the National Quotations Bureau.
A market maker quoting an OTCBB stock at 1.75 bid must be firm on at least
100 shares Explanation: OTCBB quotes must be firm for a minimum number of shares depending on the price. The bid and ask side are evaluated independently to determine the minimum quote size. The minimum price and shares are as follows: 0.0001-0.0999: 10,000 shares 0.10-0.1999: 5,000 shares 0.20-0.5099: 2,500 shares 0.51-0.9999: 1,000 shares 1.00-174.99: 100 shares 175.00+: 1 share
Who has the ability to terminate a lock-up agreement before its scheduled end date?
The underwriter
Explanation:
Since lock-ups exist for the protection of underwriters, they can be terminated at any time at the discretion of the underwriter. Lock-up agreements prohibit company executives from selling shares for a period of time after a new issue, thus helping to maintain a stable share price.
A broker-dealer that is a market maker in XYZZ shares buys 5,000 shares of XYZZ subject to Rule 144 restrictions into its inventory as a bona-fide market maker. The shares have been registered by the transfer agent and are no longer subject to 144 restrictions. The market maker then sells the shares in 3 separate trades of 1,000, 1,500 and 2,500 shares each. The market maker is report this how?
required to report both the 5,000 share purchase and 3 separate sales
Rule 144 does not permit a market maker to buy “144” shares into its inventory unless the firm is a bona-fide market maker in the stock, which is the case here. The shares must be purchased at the prevailing market price and the purchase into inventory would be reported normally, since these shares are no longer restricted. When the shares are sold, in this case in 3 separate transactions, each sale reported separately.
Fails to delivery
Buy or borrow
Short fails: T+3 before open
Long fails (or fail by market maker): T+5 before open
Threshold securities: After 13 consecutive settlement days (i.e. on the 14th day)
Can settle with MOO
Lock-up period
How long company execs, etc. must wait before selling shares (used to reduce selling pressure and avoid negative perception of deal)
NASDAQ Trading Halt
Nasdaq Stock Watch Department can issue a halt
- Issuer must notify them before the release of information
Trading on primary exchange must resume before trading can resume elsewhere
- Any orders entered during a halt will be held by broker-dealer until quotation resumes
When might traders see wide spreads?
Outside normal hours and trading penny stocks
OTC registration
Rule 15c2-11
Unlike NMS, market maker applies to quote security
File form 211 with FINRA
Filing made 3 business days prior to entering priced quotes in OTC Pink or OTC BB
If trading is halted, have to refile
A qualified block positioner is…
… a broker-dealer that meets minimum net capital requirements and engages in buying or selling blocks of stock with a current market value of $200,000 or more.
At minimum, how often must a Large Trader make a disclosure filing with the SEC?
Annually
Explanation:
A 13H filing must be made via the EDGAR system at least annually within 45 days after the end of each full calendar year. Amended filings are required for any quarter in which key information changes.
The initial strike price of an option contract is determined by the:
market value of the underlying stock
The basic rule for setting of options strike prices at issuance is that the strike is based on the current market price of the stock. For example, if the strike price interval is $2.50 and a stock is trading at $18, at that moment, new contracts cannot be issued at $18, but they could be issued at, say, $17.50, $20.00, $22.50, etc. For each stock trading at $20 or less, strike prices can be issued up to 100% higher or lower; for stocks over $20, the range is +/- 50%. So if a stock is trading at, say, $50, options can be issued with strike prices ranging from $25 to $75.
A trader displays quotes briefly to manipulate prices, with no intent to actually execute at the quoted price. This is called
spoofing
Explanation:
Most spoofing quotes are cancelled within seconds. The trader has no intent to execute the quotes, because their only purpose is to create an appearance of trading activity or interest.
After placing an order and having it executed, a customer wants to know from whom the broker-dealer received payment for order flow on the transaction and specifically how much was received. This information
can be obtained by the customer, either on the trade confirmation or by written request.
Explanation:
Trade confirmation must indicate whether the broker-dealer received payment for order flow on a transaction. The source and amount of payment can be obtained by customers on written request.
Can Firms reuse MPID for different Alternative Trading System?
Firms must have a unique MPID for each ATS they operate
A customer sells short 500 shares of Bertram Labs stock on Tuesday. However, the customer’s broker-dealer has trouble locating these shares for delivery by the settlement date. What is the deadline for closing out the short sale?
open of trading on Friday
Explanation:
Fails to deliver in a short sale must be closed out by the open of trading on the next business day after the failed settlement. The T+2 settlement date is Thursday and the next business day (T+3) is Friday. It is important to note that for T+2 settlement, a short must be closed out by the beginning of T+3.
FINRA 5% policy relevant factors
- type of security
- frequency of traded stock
- selling price of security
- dollar amount of transaction
- nature of broker/dealer’s business
- patterns of markups
- right to make a profit (for principal trades only)
Assuming information is received sufficiently in advance of the effective date of a rights registration, when is the ex-rights date?
The first business day after registration’s effective date.
Explanation:
The normal ex-rights day is the first business day after the registration’s effective date. If information is not received in advance of the registration, it is the first business day the UPC Committee deems practical.
ADF Trading Center
Either an ADF market participant or a registered reporting ADF ECN
How does an ADF Participant obtain FINRA’s approval to use a second MPID?
Submit a written request to FINRA
Explanation:
The first MPID assigned to a participant is the “primary.” To obtain a second MPID, the participant must request it in writing and obtain permission from FINRA Market Operations.
A customer sells 100 shares of a stock long on Monday, June 3. If the firm can’t deliver this stock by the T+2 settlement date, what is the required time for closing out the fail-to-deliver?
open of trading on Monday, June 10
Explanation:
If a fail result on a long sale, the firm must close the fail no later than the open of trading on the third consecutive settlement day following the settlement date. For stocks, this is usually T+5 or S+3.
Four conditions must be met to qualify for the safe harbor for issuer securities repurchases. They are
manner, timing, price and volume.
Explanation:
Under Rule 10b-18, failure to meet any one of the four conditions disqualifies the share repurchases from the safe harbor. Note, an issuer may buyback shares outside the safe harbor but will be subject to heightened regulatory scrutiny.
At minimum, how many separate disclosures of the broker-dealer’s compensation must be made in a penny stock transaction?
One
Explanation:
One written disclosure, delivered prior to the transaction, satisfies the requirement. The broker-dealer must retain records to verify that the compensation disclosure is met.
If a company is current in its SEC filings, how can it terminate quotes for its shares on the OTCBB?
Get all market makers to withdraw
Explanation:
A company quoted on the OTCBB cannot voluntarily terminate quotes, except by failing to file SEC reports. When the last market maker withdraws, quotes will be terminated.
Firm A enters into a written agreement, under which it will outsource to Company B its responsibilities for reporting order data to FINRA and maintaining required records. Company B is considered
A Reporting Agent
Explanation:
Reporting and record-keeping requirements may be outsourced by written agreement to a Reporting Agent. However, the member remains responsible for reporting and record-keeping requirements.
For purposes of the short-sale circuit-breaker, an uptick is defined as a displayed price
Above the best bid
Explanation:
An uptick means that the displayed quote price increases from the current best bid. The best bid is always the reference point, and the transaction price must be at least one increment (usually 1 cent) above it.
For listed stocks, when are quotes permitted with four decimal places?
When stocks are trading less than $1.00
The OCC does all of the following EXCEPT:
A standardize listed options contracts
B guarantee the performance of the writer of listed options contracts
C adjust listed options contracts for cash dividends
D issue listed options contracts when a report of an opening transaction is received
The best answer is C.
The OCC does not adjust listed equity options for normal cash dividends. It only adjusts contracts for 2:1 or 4:1 stock splits and for extraordinarily large cash dividends. For fractional stock splits, stock dividends and reverse stock splits, it does not adjust the contract - rather it adjusts the “deliverable” if there is an exercise. The OCC standardizes listed option contracts, issues listed options contracts and guarantees performance of contract writers upon exercise.
Which of the following is true regarding IPO share allocation reports?
Pre-effective and final pricing reports will not include the names of retail investors.
Explanation:
FINRA Rule 5131 requires the lead manager to provide the issuer with regular reports of indications of interest including the names of institutional investors and the number of shares indicated by each along with aggregate retail demand. After settlement, a final report with similar information must also be provided. Reports are submitted to the issuer’s pricing committee or, in the absence of one, to the board of directors.
OATS
Order Audit System
- Audit trail must provide an accurate, time-sequenced record of orders and transactions, beginning with receipt of order and further documenting the life of the order through execution or cancellation
Rule 15c2-11 requirements
Must show you know something about the security
- Current regulator filings
- Prospectus
- Offering circular
- Most recent 10-K
- Continued collection of 10-Q and 8-k
- If Market Maker can’t demonstrate due diligence, can’t quote security
Maximum allowed stabilization price when the market is closed
The prior closing price
All market-wide circuit breakers are based on…
…percentage changes from the previous day’s S&P 500 close.
Broker-dealer D receives a request from a customer to know the identity of venues to which the customer’s orders have been routed. The request must be answered by providing identities for which routed orders?
Both directed and non-directed
Explanation:
On request, a broker-dealer must disclose to a customer the identity of venues to which customer orders were routed in the six months before the request. This includes both directed and non-directed orders, along with transaction times.
Is An individual investor with a securities portfolio of $75 million an institutional investor?
No
Explanation:
Under Rule 144A, Qualified Institutional Buyers (QIBs) are defined as:
-Insurance Companies
-Investment Companies
-Business Development Companies
-Investment Advisers
-Broker dealers owning and investing discretionary assets of at least $10 million
-Any other institution with discretionary assets of at least $100 million
Reason for and duration of trading halts
FINRA single stock suspension (OTC equity)
- Up to 10 days
- To protect investors (e.g. manipulation, inaccurate filings)
SEC single stock suspension (NMS stocks)
- Up to 10 days
- To protect investors (e.g. manipulation, inaccurate filings)
SEC suspension (market-wide)
- Up to 90 days
- Must notify the US president
Orders may be matched against Supplemental Orders at what price?
At the NBBO
Explanation:
An order may be matched against Supplemental Orders only at the NBBO, and only if order size is less than (or equal to) the aggregate size of the Supplemental Order interest available at that price.
Following an analysis of a retail client’s investments and objectives, a registered representative is preparing a few action items for the client to consider implementing in the next few months, in the interest of long-term planning goals articulated by the client. A couple of these potential investments would result in higher commission costs to the client, although other suitable, lower cost options may exist. According to Regulation Best Interest (BI),
the practice of recommending products that carry higher commissions than other suitable alternatives is not in the customer’s best interest.
Explanation:
According to Regulation Best Interest (BI), it is not acceptable to recommend a security or transaction that, although potentially suitable, entails higher commission costs to the client than other similarly appropriate investment alternatives. This practice was previously acceptable under the suitability rule, but not according to the heightened standards of Regulation BI.
One client of Investment Adviser Z writes a letter to another, upon Z’s recommendation. The letter simply states that the client has used the services of Z for five years. Is this an illegal testimonial?
Investment advisers are not allowed to solicit or recommend testimonials. A testimonial can be either an endorsement or a statement of a client’s experience (without an endorsement). The key point here is that it was recommended by the IA.
Company B was delinquent in making its last quarterly filing of its 10-Q report with the SEC. What would cause the company to become ineligible to have its securities quoted on the OTCBB?
Missing timely filing of the next two quarterly filings
Explanation:
Dealers are prohibited from quoting a security on the OTCBB if the issuer has been delinquent in its SEC filings three times in the past two years. This is the OTCBB’s “three-strike rule.” In this case, missing two more quarterly filings would trigger this prohibition.
A “multi-day event” for clearly erroneous trades begins on Monday and ends on Wednesday. If FINRA decides to cancel all transactions during the event, when must it declare the event?
By the start of trading on Thursday
Explanation:
A FINRA officer may cancel all transactions that occurred during the multi-day event by declaring such an event not later than the start of trading on the day following the last identified transaction.
What term is given to the illegal and manipulative practice of simultaneously entering both buy and sell orders of substantially the same type, size and price - to create an appearance of activity or interest?
Wash trade
Explanation:
Wash trades are considered illegal and manipulative under U.S. securities law and FINRA rules.
After voluntarily withdrawing as a market maker, which statements are TRUE regarding re-registration?
I A NASDAQ market maker must wait 1 business day
II A NASDAQ market maker must wait 20 business days
III A CQS market maker must wait 1 business day
IV A CQS market maker must wait 20 business days
II and III
If an excused withdrawal is NOT given, NASDAQ market makers that voluntarily withdraw their quotes cannot re-enter the market for 20 business days; while CQS market makers only have to wait 1 business day before they can re-enter quotes.
A trader is long an options contract that is nearing expiration which currently has no bid on the floor; and which is offered at $.05. Which closing transaction should be used?
Cabinet trade
A “cabinet” trade is a closing trade for a worthless contract at a premium of $.01 per share ($1 aggregate premium per contract). These are handled by Order Book Officials or Specialists/DMMs as an “accommodation” to give customers a closing trade confirmation. Since there is no bid on the floor for this option, the only way to effect a closing sale is through such a “cabinet trade.”
OTC Options
Created individually between 2 counterparties
Unlike exchange listed options, OTC options have counterparty risk
Which of the following orders can be accepted up to the 9:30 AM ET open of the NASDAQ Market?
A OIO order
B MOO order
C LOO order
D MOC order
The best answer is A.
Prior to market opening at 9:30 AM, all orders are accepted up to 9:28 AM without restriction. Between 9:28 AM and 9:30 AM, MOO (market on open) and LOO (limit on open) orders are not accepted. Only OIO (order imbalance only) orders are accepted so that NASDAQ can set an appropriate opening price based on the balance of buy and sell orders present in the market and perform the Opening Cross at 9:30 AM. The MOC (market on close) order is only used at the end of the trading day.
A broker-dealer buys from a customer a penny stock on a principal basis. It has not made interdealer purchases or sales of the same stock consistently. What must be disclosed?
The price at which it last purchased the stock from another dealer in a bona fide transaction
Explanation:
If the dealer has not consistently made interdealer sales in the same stock, it must disclose this fact, along with the price of its last purchase from another dealer in a bona fide transaction.
According to Regulation M, the restricted period for distributors of a common stock with an ADTV value of less than $100,000 and a public float of less than $25 million begins
5 business days before pricing
Explanation:
“Restricted period” as defined in Rule 100 of Regulation M states that securities with an ADTV value of $100,000 or more of an issuer whose common equity has a public float value of $25 million or more is subject to a 1 business day restricted period. Securities below this threshold are subject to a 5 day restricted period, and actively traded securities (ADTV value > $1,000,000 and public float value of $150 million or more) have no restricted period.
PPD Ltd. is an OTC Equity security. Broker-dealer X purchased 20,000 shares at 11:10 AM on October 14. BD X subsequently cancels the trade at 8:15 PM on October 15. Notice of this cancellation must be submitted
By 8:00 PM on October 16
Explanation:
When a trade is cancelled at or after 8:00 PM on any date after the date of the transaction, the cancellation notice must be submitted by 8:00 PM on the business day following the cancellation of the transaction.
Bid/offer outside limit band
adjusted to match limit band
“price slide”
Which of the following is not an exception to the Regulation NMS Order Protection Rule?
The trade-through execution was a regular way trade
Explanation:
An exception to the Regulation NMS Order Protection Rule would be where the trade-through execution was other than a regular way trade. The other items represent exceptions to this rule.
A broker-dealer sells 400 shares of stock for a customer on Thursday, October 9. If the shares aren’t delivered by the settlement date, the sale must be closed out by the open of trading on Tuesday, October 14. What type of sale is this?
a short sale
Explanation:
Remember that the close-out requirement is the open of business on T+5 for long sales of stock by anyone and also for short sales by market makers (in bona fide market-making activity). However, the close-out requirement is the open of business on T+3 for short sales of stock by anyone except a market maker engaged in bona fide market-making activity.
The Trade Reporting Facility for NASDAQ reports trades of which of the following securities?
I NASDAQ Global Market stocks
II NASDAQ Capital Market stocks
III Third Market trades of exchange listed stocks
IV Trades of exchange listed stocks effected on the floor of the exchange
I and II only
The Trade Reporting Facility for NASDAQ (NASDAQ TRF) reports trades of all NASDAQ issues. Trades of NYSE listed issues are reported through the NYSE TRF. This reports trades of NYSE-listed issues effected OTC (both Third Market and Fourth Market trades). Reports of trades of OTCBB and Pink Sheet issues are made to the ORF (OTC Reporting Facility).
How often must broker-dealers make a report on order routing?
Quarterly
Explanation:
The Rule 606 broker-dealer report on non-directed order routing is due quarterly.
At 10:45 am, a market maker agrees to execute a trade for 1,000 shares of an OTC stock at the close of normal market hours on that trading day, at a price equal to the last trade price. What should the trade report show as the time of the trade?
16:00:00:000
Explanation:
The trade time must be shown in military-style hours, minutes and seconds and (usually) milliseconds. This is the time when parties to the transaction have agreed to all essential terms, including the actual price. If the price is conditional, the time reported is when the price becomes known – the close of normal market hours (4:00 pm) in this case.
The Securities Exchange Act of 1934 defines insiders as…
…officers, directors and owners of more than 10% of the outstanding stock of a corporation
Good ’til market close (GTMC) orders
are available for execution until 4:00
pm, ET. If the order is not executed on the continuous book during the day, it
will participate in the closing cross, after which any unexecuted portion will be
cancelled. If a GTMC order is entered after the closing cross, it will be treated as
a system hours IOC order.
Must a company with securities quoted on the OTCBB notify the SEC if it fails to file an annual or quarterly report on time?
Yes, within one days of the delinquency
Explanation:
OTCBB issuers who are delinquent in a filing must notify the SEC no later than one business day after the filing due date. The filing is made on Form 12b-25.
Is any order with a limit price a pegged order?
no
A Level 1 trading halt can occur until
3:25 p.m.
Explanation:
A Level 1 halt is triggered by a 7% decline in the S&P 500 before 3:25 p.m. There is no Level 1 circuit-breaker after 3:25.
Reg NMS
Update and modernize equity trading
What percentage decline will trigger a Level 2 market-wide circuit breaker?
13%
Explanation:
A Level 2 halt is triggered by a decline of 13% before 3:25. It halts all equity trading for 15 minutes. There can be only one Level 2 halt per trading day.
A customer executes a long sale of Rule 144 restricted stock. Due to the restrictions on public sale of this stock, the broker-dealer can’t deliver shares right away. What is the deadline for closing out the fail-to-deliver?
T+35
Explanation:
If a fail results in securities that have restrictions that prevent good delivery, such as Rule 144 restricted stock, the firm must close out the fail after the 35th consecutive calendar day following trade date.
Jim owns 200 shares of ABC in his personal account, and Jim and Jane own 200 shares of XYZ in their joint account. When Jim places an order to sell 100 shares of XYZ from his personal account
My Answer:
The order memorandum must be marked short
Explanation:
Jim does not own XYZ in his personal account; hence, a sale of XYZ from his personal account is considered a short sale and the order memorandum must be marked accordingly as a short sale.
A Nasdaq market maker executes a trade at 7:00am which it later believes to be clearly erroneous. By what time must it notify Nasdaq?
7:30am
Explanation:
Nasdaq Rule 11890 requires market makers to notify Nasdaq of a clearly erroneous trade within 30 minutes of execution. The notification deadline applies equally during and outside normal market hours.
Large trader for exchange-listed equities and options
- Equal or exceed two million shares, or $20 million in fair market value during any calendar day, or
- Equal or exceed 20 million shares, or $200 million in fair market value over the course of any calendar month
When must underwrite notify issuer and public about expiration of lock-up period?
2 days before
An important change from OATS to the CAT system is in the reporting of customer account and identifying information. CATs will require
the customer’s account number, account type and date account opened.
Explanation:
The CAT system will log customer account data, which OATS does not require. This includes the account number, account type and date the account was opened.
Clearly erroneous trade event
An obvious mistake in a trade
- Notify NASDAQ with 30 minutes
- EVEN OUTSIDE normal hours
NASDAQ can void, amend or decline to act
- Cannot assign trades to another counterparty
Appeals can be filed within 30
- NASDAQ market operations review committee
What is a bear call spread?
The bear call spread is used when the investor thinks that the price of the underlying asset will go down moderately in the near term. Vertical bear call spreads can be implemented by buying a call option with a certain strike price and selling a call option of a lower strike price on the same stock that expires in the same month. The bear call spread option strategy is also known as the bear call credit spread because the investor receives more premium than what is paid to implement the strategy. The costlier option is the short call which makes the position bearish.
Cabinet transactions may be accepted for:
I Opening transactions for public customers
II Closing transactions for public customers
III Opening transactions for member accounts
IV Closing transactions for member accounts
II and IV only
Cabinet trades (“accommodation liquidations”) are used to provide a record to individuals who have worthless options positions that are soon to expire “out the money.” In a closing transaction, the Order Book Official will accept limit orders from holders and writers of “out the money” contracts to close the positions at a total premium of $1 per contract ($.01 per share). The OBO will match the orders as an accommodation, and report the executed trades to the firm that placed the order. The OBO may accept these trades from anyone, not just the public (which is the case with all other orders placed with OBOs). Thus, market makers and member firms may place cabinet trades with OBOs for their own accounts.
Regulation M was designed to prevent companies from using share repurchases to manipulate the price of securities
during a distribution
Explanation:
The purpose of the rule is to prevent companies from using share purchases to manipulate securities’ prices during a distribution.
Broker-dealer D receives a request from a customer to know the identity of venues to which the customer’s orders have been routed. The request must be answered by providing identities for which routed orders?
Both directed and non-directed
Explanation:
On request, a broker-dealer must disclose to a customer the identity of venues to which customer orders were routed in the six months before the request. This includes both directed and non-directed orders, along with transaction times.
Primary MPID requirement
firm and 2 sided quotes
A firm that has the responsibility to monitor securities for the purpose of preventing unauthorized issuance is a(n)…
registrar and transfer agent
Explanation:
The term “transfer agent” includes any person who registers the transfer of securities or exchanges or converts securities. The definition includes a “registrar,” the person who monitors securities to prevent unauthorized issuance.
A customer has bought 30,000 shares of stock and 40 bonds in her account at broker-dealer ABC. If she wants to move half her stocks and half her bonds to an account at broker-dealer DEF, which physical securities will need to be moved?
neither the stocks nor the bonds
Explanation:
Securities, such as stocks and bonds, are typically deposited with a clearing house. Usually, they do not physically move when they are sold or transferred between brokers.
Settlement of when issued contracts takes place:
on the date set by the Uniform Practice Committee
The settlement date for “when issued” contracts (where trading starts in a stock before the physical securities are printed and delivered) is a date set by the Uniform Practice Committee. (They usually set it 2 business days after the physical securities are delivered to the underwriter.)
a block size order means…
…an order for at least 10,000 shares or a market value of at least $200,000.
When systemizing orders (not electronically transmitted) so that COATS can capture a trade, these information items must be captured:
option symbol, expiration month and year, strike price, buy or sell, call or put, number of contracts, and identity of the Clearing Trading Permit Holder.
After a reverse stock split, what happens to all open orders?
They are cancelled
Accepting payment or incentive for market making
Not allowed! However, after rejecting a payment, the market maker can still make markets
NMS Rule 605
M&M Rule - Monthly Reports filed by Market Centers (i.e. exchanges) Disclosure of quality of execution: - Speed of execution - Execution relative to public quotes - Price improvements
A customer enters an order to buy 600 shares of stock at 2:46 p.m. Due to an error, the trade does not execute until almost an hour later, at 3:44 p.m. The trade report will indicate
the actual execution price along with a .P modifier.
Explanation:
A modifier of .P indicates a Prior Reference Price for a trade that occurred earlier. The report shows the actual execution price and includes the .P modifier to flag the late trade.
System hours immediate-or-cancel (SIOC) orders
can be executed anytime
from 4:00 am–8:00 pm but will be cancelled unless at least a portion of the order
is marketable upon order entry. Any portion that is not immediately marketable
will be cancelled
Order-splitting is prohibited if the primary purpose is to increase
monetary or in-kind payments.
Explanation:
FINRA prohibits order-splitting for the primary purpose of increasing monetary or in-kind payments, including credits, commissions, gratuities, rebates and fees.
A Nasdaq-listed put option trades no-bid for ten seconds before a trade is executed. What must happen to trigger an obvious error?
The option one strike price above must also trade no-bid
Explanation:
It takes at least two options of the same class quoted no bid to trigger the obvious error on this basis. For call options, the strike price below must be no bid. For put options, the strike price above must be no bid.
Trading halt codes
T.1 - Stock is halted
News pending
Halt time
T.2 - Stock remains halted
News release
Halt time
T.3 - Stock remains halted but preparing to reume
News has been widely disseminated
2 times displayed (e.g. quote @ 2:15 / trade @ 2:20)
A Post-Only order to buy 800 shares is entered at a price that would lock the exchange book. The inside bid/offer is $33.14/$33.16. It will be posted on the book at what price?
$33.15
Explanation:
The Post-Only order is designed to promote displayed liquidity. Such orders that would lock the book are posted one tick away (toward the inside) from the best price on the opposite side of the market. In this case, the best offer on the opposite side of the market is $33.16, and one tick away (inside) is $33.15. Notice that this price does not lock the book. The purpose is to allow market participants to get their orders resting on the book and control how often then “take” versus “make” liquidity.
The NBBO for XYZZ stock listed in the Capital Market is .97 - .98. Which of the following orders CANNOT be accepted for XYZZ stock?
A Sell at 1.011
B Sell at .978
C Buy at .976
D Buy at .981
Sell at 1.011
Rule 612 of Regulation NMS prohibits sub-penny pricing for NMS (NYSE, NYSE-American and NASDAQ) stocks trading at $1.00 or more. Since this stock is trading at less than $1.00, orders for less than $1.00 can be placed in sub-penny increments. However, any order for $1.00 or more cannot be placed in sub-pennies. Thus, the order to sell at $1.011 is prohibited - an order to sell could only be accepted at, say, $1.01 or $1.02.
Penny Stock
OTC equity worth less than $5.00 per share
Non price factors for clearly erroneous
extreme volatility
market malfunction
Under Regulation M, market maker activities in a security which is subject to a potential acquisition may be limited for a period of time
beginning the day proxy materials are sent to shareholders
Explanation:
Under Regulation M, the restricted period for a merger begins the day proxy materials are sent to shareholders.
MPID used for reporting and execution
Same MPID for same trade (can’t use 1 for execution and one for reporting)
How to determine net long/short?
A broker-dealer must aggregate all its positions UNLESS:
Independent aggregation is approved, which requires
- written plan to identify each unit in the firm
- Each unit determines its own net position
- Traders are assigned to only one unit
- Traders from one unit do not coordinate with traders in another
For NASDAQ, orders are executed based on
Price priority
All-or-none orders
If a market maker holds a customer all or none buy order and receives a sell order that is not enough shares, the market maker WILL NOT execute the customer’s AON order
The same applies to options trading
What is a bullish spread?
The more valuable of the two options determines the market attitude of the spread. For calls the more valuable option is the one with the lower strike price; for puts the more valuable option is the one with the higher strike price. A bull spread means that either the long call or short put must be the dominant position (i.e. higher premium).
A security has been placed on Nasdaq’s Reg SHO Threshold List. To get off this list, for how many days must it avoid exceeding the specified level of fails?
Five consecutive
Explanation:
Once a security is on the Threshold List, it needs five consecutive days where the number of fails are below the specified limit to get off the threshold list. Put differently, it takes five consecutive days of fails above limit to get on the list, and five consecutive days below limit to get off.
Ask
Price a market maker is willing to sell for either itself or a customer
All of the following may trade for their own account on the floor of an options exchange EXCEPT a:
floor broker
On the Options Exchanges, floor brokers handle trades as agent only. They accept orders from the public for execution but do not trade for their own account. Market makers on the exchange floor make markets in option contracts and are buying and selling for their own account. Registered options traders and competitive options traders are individuals that trade on the floor for themselves to add liquidity to the market. They can take positions and carry them.
Short sale
borrow stock, sell, buy back (at hopefully lower price)
Under Regulation M, any security that is being sold in a distribution or into which the security can be converted, is known as a(n)…
Covered security
According to the definitions of Regulation M, a covered security is defined as any security that is the subject of a distribution, or any reference security. The subject security is the security being sold while the reference security is anything convertible into the subject security. Together, they are referred to as covered securities.
The NYSE TRF reports
completed trades of exchange listed issues effected OTC in the “Third Market.” Note that it does not show quotes.
What positions best describes a bear call spread?
Sell a call with a low strike price and buy a call with a higher strike price
Explanation:
A bear call spread is established with two positions: 1) selling a call with a low strike price and 2) buying a call with a higher strike price. It is also referred to as a credit call spread. The market view of this position is bearish and the investor desires the spread to narrow.
Which securities settle on a T+1 settlement cycle?
Government securities and options
Explanation:
Government securities and options require T+1 settlement - settlement on the next business day following the trade.
Limit Up Limit Down trading pause
5 minutes
quotes can be updated
new quotes can be added
An investor anticipates a decline in the broad market and expects profit potential based on the degree of the decline. This investor’s position is what?
Long index put
Explanation:
An investor that is bearish on the overall market benefits by buying index puts. There must be a substantial decline in the stock to profit, because the investor must recover the premium paid.
In determining if there is a violation of position limits or exercise limits, the Options Clearing Corporation will aggregate long calls with:
Short Puts
To determine if there is a violation of position or exercise limits, the Options Clearing Corporation aggregates contracts on the same issuer on the same side of the market. Thus, long calls are aggregated with short puts (both representing the “upside” of the market); while long puts are aggregated with short calls (both representing the “downside” of the market).
How to calculate large trader status with index options
Dollars Traded = Options Contracts × Multiplier × Market Price of Index Options
In what manner and how often must a broker-dealer inform customers that information on their recent order routing is available on request?
In writing, at least annually
Explanation:
Customers must be notified in writing at least annually of their ability to request information on recent routing of their orders.
A market maker seeking an excused withdrawal from Nasdaq for involuntary failure to maintain a clearing arrangement can expect the withdrawal to be granted for up to
…60 days
Explanation:
Excused withdrawal requests to Nasdaq MarketWatch for vacation or religious holiday are typically granted for five business days. Excused withdrawal requests for investment banking activities will vary in length. Excused withdrawal requests due to involuntary failure to maintain a clearing agreement are typically granted for 60 days. Excused withdrawal requests for a technical problem are typically granted for five days, but must be requested through Nasdaq Market Operations, not MarketWatch.
For purposes of the requirement to provide statistical data on order execution quality, the definition of a covered order excludes any order for which the customer requests
Special handling for execution
Explanation:
The definition of covered order includes market, limit and IOC orders, but not orders for which the customer requests special handling such as at the market open or close, with stop prices, AON or FOK.
What is adjusted in a stock split
Number and price of shares
In a 3:2 split, Number of shares = (current * 3) / 2
Price of shares = (current * 2) / 3
Registered rep M occasionally receives orders at his home. He then calls the orders into his main office an hour or so later. Must M maintain a synchronized clock in his home?
Only if his home is considered a regular place of business
Explanation:
RRs who work from home must meet OATS rules. However, if a personal home is not considered a regular place of business, orders are not officially received until they are taken or sent to an office. In some situations a home is considered an RR’s regular place of business. In other cases, it is not.
clearing house
where securities such a stocks and bonds are typically deposited
After 1 Limit Up Limit Down trading pause
Primary market decides:
- Resume
or
- Another halt
The Nasdaq halt cross process aims to reopen trading after a halt at a price that
reflects market supply and demand.
Explanation:
The process allows investors to enter orders and participate in price discovery during a halt. When executions resume, it seeks to maximize trading volume at a price reflecting market supply and demand.
In a multi-stock event, FINRA may exercise its authority to cancel trades as “clearly erroneous” when they are executed
at prices more than 10% below the Reference Price and involve between five and 19 stocks.
Explanation:
There are two types of multi-stock events. One involves 5 or more, but less than 20, stocks trading at 10% or more away from Reference Price. The other involves 20 or more securities trading at 30% or more away from Reference Price.
Who is eligible to participate in the Alternative Display Facility (ADF)?
FINRA members in good standing
Explanation:
All FINRA members in good standing are eligible to participate in ADF. Once approved, the member is called an ADF Market Participant or Registered Reporting ADF Market Maker.
Which of the following would violate O.C.C. position limits, assuming a 75,000 contract limit?
I Long 40,000 ABC Call Contracts/ Long 40,000 shares of ABC stock II Long 40,000 ABC Call Contracts/ Short 40,000 ABC Put Contracts III Long 40,000 ABC Put Contracts/ Short 40,000 shares of ABC stock IV Long 40,000 ABC Put Contracts/ Short 40,000 ABC Call Contracts
II and IV only
Position limits only apply to options contracts on each “side” of the market - they do not apply to stock positions on each side. Thus, 40,000 Long Calls (40,000 contracts on the upside) and 40,000 Short Puts (40,000 contracts on the upside) exceed the maximum 75,000 contract limit on 1 side. Similarly, 40,000 Long Puts (40,000 contracts on the downside) and 40,000 Short Calls (40,000 contracts on the downside) exceed the 75,000 contract limit on 1 side.
Locked-in trades may be determined in the ADF processing system through any of the following methods except
Trade Step-In
Explanation:
The three permissible ways to lock-in trades are Trade by Trade Match, Trade Acceptance and T+N Trade Processing.
A broker-dealer enters an order to buy shares of stock for its own account at about the same time a customer places a block order to sell the same stock. This is a front-running violation if
the broker-dealer had foreknowledge of the public order and used it for price advantage.
Explanation:
The two prerequisites for a front-running violation are foreknowledge of a block order and use of this knowledge for economic gain or price advantage. It also must involve foreknowledge of a block order (10,000 shares or more).
A member firm may assume a loss in a customer option account:
if the loss resulted from the member’s mistake
or
if approval of the Exchange is obtained in advance
Exchange rules prohibit a member from assuming a customer loss, unless the loss resulted from the member’s mistake; or the Exchange specifically allows such action to be taken by the member (not likely!).
Quotes for exchange listed issues show in
CQS - the Consolidated Quotations Service
Market maker E is quoting Issuer F, an OTC Equity Security, at .98 -1.02. MM E must be willing to trade
At least 1,000 shares at .98 and 100 shares at 1.02
Explanation:
As Issuer F is an OTC Equity security, it must maintain a quote size based upon the price of the security, covering both the bid and offer side of their quote accordingly.
Give up
Firm reports on behalf of another firm
All of the following information is included in an ACT last sale report EXCEPT:
A security symbol B name of member making report C execution price D time of execution
The best answer is B.
The information included in a trade report made to the TRF is:
- Security symbol;
- Number of shares (round lots only; odd lots are not reported for trade purposes);
- .Z if reported late during regular market hours; .U if reported late outside of regular market hours;
- Price of execution;
- Time of execution.
The name of the member making the report is not included.
Three sell limit orders are entered on NASDAQ, with a one-minute interval between each entry. One order is GTC and the other two are day orders. The limit prices are $13.19, $13.21 and $13.25. The first order to be executed will be
the order with a $13.19 limit price.
Explanation:
Nasdaq orders are executed on a price priority basis. This means the best-priced limit order (highest buy or lowest sell) is executed first, regardless of the time entered. If two orders have the same limit price, the first entered has priority. There is no distinction between day and GTC limit orders.
On what date must a shareholder be the registered owner of a share to receive a cash dividend?
Record date
Explanation:
When an issuer pays a dividend to its equity holders it determines who receives the dividend by reviewing the shareholder list as of the record date. Put differently, the record date is the date when an investor must own the stock to receive the dividend.
FINRA 5% policy calculations
based off inside market (not cost)
debt securities based off prevailing market price
* generally assumed to be the firms contemporaneous price
If an issuer is removed from the OTCBB for failure to file timely periodic reports and has lost all appeals, what is the path to reinstatement of quotes on the OTCBB?
Absent a successful appeal, removal from the OTCBB lasts one year at minimum. Then, the request to have quotes reinstated must be made through a market maker, who files FINRA Form 211 to receive a trading symbol.
Assuming that the Standard and Poor’s 500 Average closes at 2,720, the U.S. securities markets will close for the balance of the day if the average declines below:
2,176
The circuit breaker rule shuts the markets for 15 minutes if the S&P 500 Index drops by 7%, and shuts them again if it drops by 13% from the prior day’s closing value. After reopening, if the index drops by 20%, the markets are closed for the rest of the day. If the index is at 2,720, a 20% drop is 544 points. 2,720 - 544 = 2,176.
Discretionary order
Order with a displayed limit price and an undisplayed range that the customer will accept
Does not apply against market order
Does apply against limit orders
Becomes IOC and attempts to trade (low priority)
If a multi-day trading event continues for a week, which of the following transactions may not be cancelled by FINRA?
Settled trades
Explanation:
Settlement is final, and there is no clearly erroneous cancellation of trades that have already settled. Also, a multi-day event cannot affect shares resulting from an IPO.
FINRA Rule 6121
1 gives FINRA the
authority to impose a market-wide circuit breaker on all NMS stock trading off
the exchange (that is, FINRA can halt all OTC trading of NMS stocks):
◆ If other major securities markets (e.g., the exchanges) initiate marketwide trading halts in response to their rules or extraordinary market
conditions, or
◆ If directed to do so by the SEC
In reporting total short position to FINRA, how do firms determine their short position?
the firm’s proprietary short positions plus its customer’s short positions
Explanation:
On the short interest report, due on the 15th and last day of each month, broker-dealers must report gross firm and customer short positions.
Regulation T
Customers must pay for securities T+4 (settlement of T+2 plus another 2 days)
Limit up / Limit down frequency of calculation
Every 30 seconds, but only updated when it more than 1% away from the current reference price
For NMS Stocks, what is a Qualified Block positioner under the Securities Exchange Act of 1934
Trades block of stock with a current market value of $200,000 or more in a single trade or several transactions at approximately the same time to facilitate a sale or purchase by a customer
Form T
Used when trades cannot be submitted electronically
