Unit 16 Flashcards
1) The simultaneous purchase & sale of the same or related securities to take advantage of market inefficiency
2) The difference between the interest paid on tax exempt bonds & the interest earned by investing the proceeds in higher yielding taxable securities. Federal law restricts earnings in connection with tax exempt bonds
Arbitrage
During a market halt, investors can still…
Cancel existing open orders
A Level 1 or 2 Halt cannot occur more than…
One time per day
1) 20% decline in S&P500
2) At any time - trading will halt & not resume for rest of day
Level 3 Halt
1) 13% decline in S&P500
2) Before 3:25 pm - 15 minutes
3) At or after 3:25 pm - trading may continue unless Level 3 Halt
Level 2 Halt
1) 7% decline in S&P500
2) Before 3:25 pm - 15 minutes
3) At or after 3:25 pm - trading may continue unless Level 3 Halt
Level 1 Halt
1) Priority - first order in
2) Precedence- largest order
3) Parity - spin the parity wheel
Order the DMM awards a trade
A market in which buyers enter competitive bids & sellers enter competitive asks simultaneously
Ex: NYSE
Auction Market
A different way to calculate margin requirements for an account based on the net risk of an entire portfolio of securities rather than a standardized percentage applied to each individual position
Customer portfolio margining (CPM)
If a customer in a margin account buys stock & simultaneously buys an option, the customer must deposit…
50% if the purchase price of the stock & 100% of the premium
When buying options, customers must deposit…
100% if the premium
Basic equation for the calculation of combined equity
LMV + CR - DR - SMV = EQ
A customer account that has long & short margin positions in different securities.
Combined account
For stock trading at or above $5 per share, the minimum maintenance requirement is…
The greater of $5 per share or 30% of the SMV. It will only be 30% when the SMV exceeds $16.67.
For stock trading under $5 per share, a customer must maintain…
100% if SMV or &2.50 per share, whichever is greater
The amount of money remaining in a customers account after all commitments have been paid in full.
Credit balance (CR)
What is the minimum deposit amount in a short account?
$2,000
The minimum maintenance requirement in a short account is…
30%
Formula for amount of equity in a short account.
CR - SMV = EQ
The amount of money in the customer’s account; equal to the sales proceeds plus the margin deposit requirement.
Credit register (CR)
The current market value of the stock position the investor sells short.
Short Market Value (SMV)
One for which another customer in writing agrees to the use of money or securities in her account to carry the guaranteed accounts.
Cross guarantee
The equity in the account above the 25% minimum requirements
Maintenance margin excess
A trader in securities or commodities who opens all positions after the opening of the market & offsets or closes out all positions before the close of the market on the same day.
Buying power is 4x the maintenance margin excess.
Day Trader
Someone who executes four or more day trades in a 5 business day period.
Minimum equity requirement = $25,000
Minimum maintenance margin requirement = 25%
Pattern Day Trader
How do each of the following effect SMA?
1) Rise in market value
2) Sale of securities
3) Deposit of cash
4) Deposit of marginable securities
5) Dividends or interest
6) Purchase of securities
7) Withdrawal of cash
8) Fall in long account MV
9) Interest charges to account
10) Stock dividend or split
1) Increases
2) Increases
3) Increases
4) Increases
5) Increases
6) Decreases
7) Decreases
8) No effect
9) No effect
10) No effect
SMA cannot be used to meet a…
A maintenance margin call
The buying power of SMA is…
2:1
Utilizing the SMA increases the…
Debt balance
Customers wishing to remove cash dividends from a margin account must do so in how many days?
39 days
The amount of SMA in the account is equal to the…
The greater of the EE or the amount already in SMA.
A notation on a customers general or margin account indicating that funds are credited to the account on a memo basis. The account is used much like a line of credit.
Special memorandum account (SMA)
The value of securities in a margin account that is in excess of the federal requirement.
Excess Equity (EE)
Market value at maintenance formula
DR / 0.75
A demand that a margin customer deposit money or securities when the customers equity falls below the margin maintenance requirement set by the BD or FINRA.
Margin maintenance call
The power of Regulation T that applies to the withdrawal of securities from a restricted account. The customer must deposit an amount equal to the unpaid portion of the securities being withdrawn in order to reduce the debit balance. The requirement is the reciprocal of the initial margin requirement.
Retention requirements
A margin account in which the equity is less than the regulation T initial requirement.
Restricted account
In a long margin account what is the minimum maintenance requirement?
25% if LMV
The minimum equity that must be held in a margin account, determined by the BD & FINRA. The amount of equity required varies with the type of security bought in margin & the BD’s house requirement is usually higher than that set by FINRA.
Margin Maintenance Requirement
Equation to determine amount of equity.
LMV - DR = EQ
Customers net worth in the margin account; it represents the portion of the securities the customer fully owns.
Equity (EQ)
The amount of money borrowed by the customer.
Debit register (DR)
Current market value of the stock position the investor purchased.
Long market value (LMV)
1) < $2,000
2) Between $2,000 - $4,000
3) > $4,000
1) 100% of purchase price
2) $2,000
3) 50%
What are the minimum deposits for Regulation T & FINRA?
Regulation T = 50% of the market value of purchase
FINRA = initial deposit cannot be less than $2,000, unless paid in full
Securities exempt from Regulation T include…
1) US Treasury bills, notes & bonds
2) Government agency issues
3) Municipal securities
Buying & selling securities prior to the payment due date without making payment. This is a violation of Regulation T.
Freeriding
If no extension is received by morning of 3rd business day after settlement, how long is the account frozen for?
90 days
A BD may disregard any sum due from a customer not exceeding?
$1,000
A registered trader that is obligated to maintain a fair & orderly market for specific securities & orderly market for specific securities assigned to the firm. Formerly known as specialists, they provide NBBO quotes, facilitate liquidity, open & close securities & furnish trading feedback to brokers.
Designated Market Maker (DMM)
What cannot be purchased on margin but can be used as collateral?
1) Mutual funds
2) New issues
What cannot be purchased on margin & cannot be used as collateral?
1) Put & call options
2) Rights
3) Won nasdaq OTC issues not approved by FRB
4) Insurance contracts
What may be purchased on margin & used as collateral?
1) Exchange listed stocks, bonds
2) Nasdaq stocks
3) Non Nasdaq OTC issues approved by FRB
4) Warrants
A security that is eligible for purchase on margin. A form is permitted to lend money to help customers purchase securities, using them as collateral for margin purchases.
Marginable securities
The federal reserve board regulation that governs customer cash accounts & the amount of credit that firm & dealers may extend to customers for the purchase of securities. Currently sets the loan value of marginable security at 50% & the payment deadline at 2 days after settlement.
Regulation T
An optional contract between a firm & a margin customer that permits the firm to lend margin securities to other brokers.
Loan Consent Form
BDs are limited to pledging how much of a customer’s debt balance as collateral?
140%
Registered in the name of the firm.
BD is known as the nominal or names owner. Customer is beneficial owner
Street name
Gives permission to the BD to pledge customer margin securities as collateral.
Hypothecation agreement
A component of a customers margin account agreement, outlining the conditions of the credit arrangement between the brokerage firm and customer
Credit agreement
Using borrowed capital to increase investment return
Leverage
Stock is borrowed and then sold short, enabling the customer to profit if it’s value declines
Short margin account
Customers purchase securities and pay interest on the money borrowed until the loan is repaid
Long margin account
To adjust the value of the securities in an account to the current market value of those securities. It is used to calculate the market value and equity in a margin account.
Done every business day on basis of the closing price of the stock
Mark to market
Securities can be borrowed from
- The member firm executing the short sale
- Margin customers
- Other member firms
- Institutional investors
Mandates a locate requirement
Firm must locate the security for borrowing to ensure that delivery will be made on the settlement date
Regulation SHO
The sale of a security that the seller does not own, or any sale consummated by the delivery of a security borrowed by or for the account of the seller
Buy low, sell high principal but in reverse where the sale is made before purchase
Can occur any time during trading day
Short sell profits = stock decreases in value
Short sale
A relatively wide spread indicates
A thin trading market for the security
Firm quotes are only good for
Round lots only
When are markups and markdowns charges?
When a market maker is acting as principal
What factors influence a spreads size?
- Issues size
- Issuers financial condition
- Amount of market activity
- Market conditions
The difference between a securities bid and offer price
Spread
A quotation for a security that does not represent an actual offer to buy or sell but is given for informational purposes only
Must be clearly labeled as such
Common with municipal bonds
Nominal quote
A qualified quotation whereby a broker dealer estimates the price on a trade that will require special handling owing to its size or to market conditions
Work out quote
Allows the dealer to back away if market conditions change
Qualified quote
A securities quotation subject to some condition requiring confirmation by the dealer
Opposite of a firm quote
Subject quote
The failure of an over the counter market maker to honor a firm bid and ask price; this violates Conduct Rules
Backing away
The sure price at which a trading unit of a security may be bought or sold. All quotes are these unless otherwise indicated
Firm quote
An order to execute either of two transactions. If one order is executed, all other linked orders are canceled
Alternative orders (OCO)
An order that instructs the firm to execute the entire order. Firm does not have to execute immediately
All or None (AON) orders
An order that instructs the floor broker to execute immediately, in full or in part. Any portion of the order that remains unexecuted is canceled
Immediate or cancel (IOC) order
An order that instructs the broker to fill the entire order immediately. If the entire order cannot be executed immediately, it is canceled
Fill or kill (FOK) orders
Indicates that the customer agrees not to hold the floor broker or broker dealer to a particular time or price of execution
May not be placed with the NYSE DMM
Not held (NH) orders
Executed at or as near as possible to the closing price in the OTC market
Market on close orders
Entered as a stop order and changed to a limit order if the stock hits or goes through the stop price
Stop limit order
An order that specifies it is to be executed at the opening of the market of trading in that security or else be canceled. The order will be executed at the opening price
Partial executions are allowed
At the opening order
An order that is left on the specialists books until it is either executed or canceled
Good til canceled order (GTC)
An order that is valid only until the close of trading on the day it is entered. If it is not executed by the close of trading, it is canceled
Day order
Which orders are reduced for cash dividends?
Only orders placed below the market price
(BLISS)
Not reduced by an ordinary cash dividend
Customer does not care if there is an execution due solely to the ex date reduction
Do not reduce (DNR)
A stop order that once triggered becomes a limit order instead of a market order
Stop limit order
Protects a profit or limits a loss in a long stock position and is entered at a price below CMV
Sell stop order
Protects a profit or limits a loss in a short stock position
Entered at a price above CMV and is triggered when the market price touches or goes through the stop price
Also used by technical traders who track support and resistance levels
Buy stop order
The stop order becomes a market order and is completed at the next price
Execution
Transaction at or through the stop price that activates the trade
Trigger
Becomes a market order if the stock reaches or goes through the stop price
Executed by DMM
No guarantee the executed price will be the stop price
Buy stop = increase in current market
Sell stop = decrease in current market
Designed to protect a profit or prevent a loss if the stock begins to move in the wrong direction
Stop order
Buy limit = places below CMV
Sell Limit = places above CMV
Used when investors believe stock is overpriced
Limits the amount paid or received for securities
Executed at specified price or better
Limit order
Executed immediately at the market price
Sent immediately to the reading floor for execution without restrictions or limits
Executed at current market price and has priority over all types of orders
Guarantees execution
To buy=executed at lowest offering price
To sell= executed at highest bid price
Market order
