Trading Market Basics Flashcards
What issues belong in the Primary Market?
New issues being issued for the FIRST time
What issues are in the Secondary Market?
Issues that are trading that were previously issued. It is divided into 4 markets 1. First 2. Second 3. Third 4. Fourth
What issues belong in the First Market?
Exchange listed securities (NYSE, AMEX, NASDAQ)
What is a dual listed stock?
A stock that trades on 2 or more exchanges
What is CQS?
Consolidated Quotation Services: provides a centralized place for price quotes of EXCHANGE-LISTED securities. It is divided into 3 different tapes: A, B, and C tapes
What does Network A tape report?
NYSE listed issues
What does Network B tape report?
AMEX (NYSE-MKT) issues
What does Network C tape report?
NASDAQ listed issues
What is UTP?
Unlisted trading privileges: exchanges trade NASDAQ shares under this basis
Do bonds trade on the NYSE?
Yes, but only a small few. Most bonds trade OTC
What belongs in the Second market?
Over the counter (OTC) trading of UNLISTED securities
What is the OTCBB?
The OTC Bulletin Board: a display facility run by FINRA for PUBLICLY traded companies that can’t meet exchange standards
What goes on the SOLD OTC?
New issues
What issues belong in the Third Market?
OTC trading of EXCHANGE LISTED securities
What are some common characteristics of the third market?
They compete with the exchanges by offering slightly better prices, and stay open 24 hours
What is a Payment for order flow?
Occurs when a third market and the NYSE are offering a trade at the same price. Market makers pay small amounts to retail member firms that direct the order to that market maker
What are the rules for payment order flow?
SEC allows IF:
- Payment for order flow is disclosed on customer trade confirm
- Other rules for disclosure for broker dealers and markets that make these payments
What securities belong in the Fourth Market?
Direct trading of securities OTC between large institutions
- ECN’s
- Instinet
What is an ECN?
Electronic Computer Networks: computer networks that MATCH customer orders to buy and sell 24 hours a day on an AGENCY basis
What is an ATS?
Alternative Trading System: they address the growth of ECN’s, Dark pools, etc. They have no rules for their users other than types of orders placed
What is Regulation ATS?
Requires ECN’s, Dark pools, etc be registered with SEC and regulated as broker-dealers. It requires that ATS’s that
1. Displays orders to anyone besides ATS employees and
2. Has average daily trading volume in an NMS security of 5% of aggregate volume in that issue for 4/6 previous months MUST
Link with the national securities exchange so that ECN quote is displayed and can be accessed under ADF
What is an ADF?
An Alternate Display Facility. It displays ECN quotes if the ECN wasn’t going to post its quote in an exchange order book
What are the 3 major rules of Regulation NMS?
- All market centers must enforce policies to prevent “trade throughs”
- When providing access to markets, they cannot favor one firm over the other
- Sub-penny pricing is prohibited on NMS stocks trading at $1 or above
What is a trade through?
When a market center executes an order at a lower price to that displayed by any other market center
What is Rule 602 of NMS?
Exchanges must collect Display Bids and Offers
What is Rule 604 or NMS?
Limit Order Display Rule
- Exchanges must display customer limit orders publicly so that everyone can access them
- If a customer specifically asks for order not to be displayed, then follow the request (exception)
What is Rule 605 of NMS?
Market Center Order Execution Report
- Requires market centers to prepare and make available **MONTHLY reports summarizing data execution (OTCBB and pink sheets are excluded from report)
What is Rule 606 of NMS?
Reports to Customers on Order Routing and Payment for Order Flow
- **Rule requires that detailed disclosure of payment order flow on customer confirmation
- **Upon request of customer, firm must disclose identity of the market to which the customer orders were routed in the LAST 6 MONTHS
- **Quarterly Reports are required by the member that detail the percentage of customer orders that were “non-directed”
What is rule 607 of NMS?
Each broker-dealer must NOTIFY each new customer at account OPENING and ANNUALLY thereafter of
- policies regarding receipt of payment for order flow
- policies for determining the routing of each customer order subjecting it to PMT for order flow
What is rule 611 of NMS?
Trade through rule
- All markets that quoted NYSE, AMEX, and NASDAQ stocks must be electronically linked and
- Any executable order must be executed in market with best price within 1 second
What is rule 610 of NMS?
Market access: Quoting market centers must offer automatic execution of orders - they cannon discriminate by offering members faster executions than non-members
What is rule 612 of NMS?
Sub penny quoting is prohibited on stocks trading at $1 or higher (it is $.0001 for less than $1). This rule does not apply to non-NMS stock (i.e. OTCBB or pink sheets)
What is a dealer?
- Dealers make markets and maintain inventories of securities
- They quote in bid and ask
- They SELL the stock to a person at the lowest ASK price
- They BUY the stock from a person with the highest BID price
What is a specialist/DMM?
- These are dealers on the NYSE floor
- Only 1 DMM per NYSE stock
- Market makers who CANNOT deal with the public
- Wholesalers of securities and deal only with retail members of NYSE (Goldman, Merrill, etc.)
What is a Market maker?
OTC dealers who register with FINRA and maintain a market in an issue
- there are multiple market makers per stock in NASDAQ. They compete
- OTC firms are allowed to act as broker OR dealer (cannot act as both)
Non-NASDAQ market basics:
- Not electronically linked (OTCBB and Pink OTC markets only)
- To trade, one must negotiate with market maker posting the quote through phone trade application
How do brokers and agents earn their income?
- Brokers earn commissions
- Dealer earn markups and markdowns
How does a representative place an order?
The rep. fills out an order tix either on paper or electronically?
What types of sales are subject to Regulation SHO
Short stock positions
What is regulation SHO?
Requires that the broker make sure that the shares borrowed can be delivered by settlement date
What things go on an order ticket?
- Buy or sell
- Order size
- Duration of order
- Order specifics (AON, Not held, Stop, Limit, etc)
- Security Name
- Execution Price
- Manager approval
What are the different types of order durations, and what do they stand for?
Day - canceled at end of day if not filled
GTC - Good til canceled
GTW - good through week
GTM - good through month
What is an AON order?
All or nothing. SEVERAL attempts can be made to try and fill the entire order, otherwise not executed
What is a FOK order?
Fill or Kill - ONLY ONE attempt can be made to try and fill the entire order or it is canceled
What is an IOC order?
Immediate or cancel - try to fill as much as possible in one attempt, the remaining unfilled is cancelled
What is a Not Held order?
Trader will “hold back” on an order if he think the order can be better executed later on
What is a DNR order?
Do not reduce - on ex date orders are reduced to reflect loss of dividend, unless DNR is specified
At the opening/close
To be filled at the opening or closing price, respectively
What is a Market order?
No specific price specified - order is filled at prevailing price
What is a limit order?
- A limit to buy is filled at that price or lower
- A limit to sell is filled at that price or higher
What is a Stop order?
- A stop order to sell is filled if market falls to that price or -lower (stop selling if price gets too low)
- A stop order to buy is filled if the market rises to that price or higher (stop buying if it gets too expensive)
What is the exception to prohibition of alterations to order tickets?
Can be done IF
- ) Manager approves it
- ) Reasons are documented in writing
What is a market Not held order?
An order to be filled when the trader thinks price is best - it must be executed That day
What is the resistance and support level?
Resistance level is on top - bullish
Support level is floor - bearish
When is a trade elected and executed for a Buy 100 ABC @ 21 Stop?
- Buy Stop = BS = OSLOBS = rising market
- Buys tock on next sequential price at 21 or HIGHER
- Elected at 21, executed at 22 or higher
Where do closed end and open end funds trade, respectively?
Closed end funds are listed on exchanges and trade like any other stock
Open end funds (aka mutual funds) do not trade
Where do REITS and Direct Part. Programs trade, respectively?
REITS are listed on exchanges and trade just like any other stock
Direct Part Programs (limited partnerships) do not trade
