Chapter 4 - Trading Securities Flashcards Preview

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Flashcards in Chapter 4 - Trading Securities Deck (62)
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1
Q

Market Order

A

An unpriced order that guarantees the investor an execution.

Buy –> at lowest/best offer
Sell –> at highest/best bid

2
Q

Limit Order

A

Guarantees price, but not execution.

3
Q

Sell stop order

A

Used to protect a profit or limit a loss on a long position. May also be used to establish a short position.

Examples:
Sell 100 XYZ @ 63 Stop - If XYZ trades at or below 63, the order will be elected and become a market order.
Sell 100 XYZ @ 63 Stop limit - If XYZ trades at or below 63, the order will be elected and become a limit order to sell XYZ at 63

4
Q

Buy stop order

A

Used to protect a profit or limit a loss on a short position. May also be used to establish a long position.

Example:
Buy 100 XYZ @ 68 Stop - If XYZ trades at or above 68 the order will be elected and become a market order to buy XYZ.
Buy 100 XYZ @ 68 Stop limit - If XYZ trades at or above 68 the order will be elected and become a limit order to buy XYZ at 68.

5
Q

All or none (AON)

A

As the name implies, indicate that the investor wants to buy or sell all of the securities or none of them. The investor will not accept a partial execution.

6
Q

Fill or kill order (FOK)

A

The investor wants the entire order executed immediately or the entire order canceled.

7
Q

Immediate or Cancel (IOC)

A

The investor wants to buy or sell whatever it can immediately and whatever is not filled is canceled.

8
Q

Not Held

A

The investor gives discretion to the floor broker as to the time and price of execution.

9
Q

MOO or MOC orders

A

The investor wants its order executed on the opening or closing of the market, or as reasonably close to the opening or closing as practical. If the order is not executed, it is canceled. Partial executions are allowed.

10
Q

Where orders are placed (SLOBS & BLISS)

A

SLOBS –> Sell Limits & Buy Stops are placed above the market

BLISS –> Buy Limits & Sell Stops are placed below the market

11
Q

VWAP orders

A

Large institutions will often place orders to be executed at volume-weighted average price (VWAP).

To determine the VWAP, the total dollar value of the trades must be added together and divided by the total number of shares purchased.

12
Q

Adjustments for stock splits

A

For shares, take the number of shares and multiply by the fraction (e.g. 3:2 stock split multiply shares by 3/2).

For the price, you multiple the reciprocal of the fraction.

13
Q

Commission house broker

A

Commission house broker is an employee of a member organization who executes orders for the member’s customers and for the member’s own account.

14
Q

Two Dollar Broker

A

A two-dollar broker is an independent member who executes orders for commission house brokers when they are too busy managing other orders. The name originated from the practice of charging $2 commission for every 100 shares contained in an executed order.

15
Q

Super Display Book

A

Customer orders will be electronically routed directly to the trading post for execution via the super displayed book. The SDBK bypasses the floor broker and since the order right to the DMM for execution.

16
Q

Designated Market Maker (DMM)

A

Is an independent exchange member who has been assigned a stock or group of stocks for which he or she is the DMM.

DMMs are responsible for:

  • Maintaining a fair and orderly market for the securities
  • Buying for their own accounts in the absence of public buy orders
  • Selling from their own account in the absence of public sell orders
  • Acting as agents by executing public orders left with them
  • Displaying quotes for their own account at the inside market a certain percentage of the time
  • Determining the opening and closing prices for securities and providing price discovery
17
Q

Supplemental Liquidity Providers

A

Off-floor entities with direct access to the SDBK to bid an offer for their own account.

The supplemental liquidity provider must reflect a bid or offer that is part of the inside market, the best market, at least 10% of the time. They are there to help provide additional liquidity to the securities on the floor.

18
Q

NASDAQ

A

Not located in a specific location.

Level I - Shows only the best market. Nasdaq best bid/best offer (NBBO). This is displayed to registered reps.

Level II - Shows inside market as well as bids/offers from market makers away from the market. Used by order entry firms to direct orders/execute orders in the NASDAQ system with market makers.

Level III - Has all the features of LI & LII for market makers only.

19
Q

Short sale

A

An investor who believes that a stock price has appreciated too far and is likely to decline may profit from this belief by selling the stock short.

In a short sale, the customer borrows the security in order to complete delivery to the buying party. The investor sells the stock high hoping that it can be bought back and replaced at a cheaper price.

The concept for short-selling: Borrowing friend’s car, selling it at a higher price, buy a replacement car at a lower price to return to friend, and keeping the profit.

Long position as asked by exam: the person has entered into an unconditional contract to acquire the securities but has not yet done so. That means the person bought the stock yesterday and the trade hasn’t settled. That person is deemed to be long.

20
Q

Affirmative determination

A

All sell orders must be marked either long or short. The firm must make a determination if the customer is long the security or if the customer is selling short. If the customer is selling short, the firm must determine if the security can be borrowed for delivery.

21
Q

Regulation SHO

A

Under the regulation SHO, the SEC has prohibited any SRO from adopting any price criteria as a requirement of executing a short sale.

Note: Easy to borrow list must be updated daily.

Exceptions:

  • To complete delivery when customer fails to deliver
  • Security is loan to another broker dealer
  • A fail from a good faith mistake
22
Q

Rule 200

A

Details when you can mark an order long or short.

A person is considered long security if the person holds a security future contract and has been notified that he or she will receive the underlying security.

A broker-dealer must aggregate its net positions in securities unless it qualifies to allow each independent trading unit to aggregate its positions independently.

The order marking requirements of rule 200 require the broker-dealer to mark all orders long, short, or short exempt.

23
Q

Rule 203

A

A broker-dealer may not accept an order to sell short an equity security for the account of a customer or for its own account without having borrowed the security, having arranged to borrow the security, or without having in a reasonable belief that the security can be borrowed.

24
Q

Third Market

A

Listed stock trading on NASDAQ workstation.

A transaction in an exchange-listed security traded over NASDAQ.

Example: You need 3 new shirts. You can buy at the mall or buy online.

25
Q

Fourth Market

A

Institution to institution trading through electronic trading platforms.

26
Q

OTCC BB and Pink OTC

A

In order to trade, must be a reported issuer (files quarterly reports and material events with SEC - 10K, 10Q, 8K).

The dealer is required to file form 211 with FINRA at least 3 business days prior to entering a quote. If there are changes prior to approval, the del

27
Q

Broker vs Dealer

A

A Broker acts as a customer’s agent and charges the individual a commission for executing the order.

A Dealer acts as a principal participates in the trade. If the customer is buying/selling the stock, the dealer is selling/buying it from them.

They can act as a broker or as a dealer in the transaction, but not both.

28
Q

FINRA 5% Markup Policy

A

5% markup can be charged on the execution price.

Proceeds transaction: using proceeds from a sell to immediately buy another security. Cannot charge 5% on sell and 5% on the buy.

29
Q

Block trades

A

Affirm that purchases a block of stock from a customer with a value of $500,000 or greater is considered to be a block positioner. Block positioners may not purchase the same stock on a plus tick during the last 20 minutes of the normal training day.

30
Q

Trading Along (NYSE Rule 92)

A

Prohibits member firms from executing an order for their own accounts on the same side of the market, for the same listed security, at a price that would satisfy a customer’s order, when they have prior knowledge of the customer’s order.

A firm with written permission from an institutional customer may trade along with the institution’s order. Written permission is required on a case-by-case basis, and the customer must get an allocation report detailing how much the customer bought or sold and how much the firm bought or sold.

31
Q

Circuit breakers

A

The NYSE, NASDAQ, and SEC continue to develop and test circuit breakers that will act as a safety net during times of exorbitant price changes in the market as a whole or in the price of individual securities.

Once a level is reached, it will not halt again until it reaches the next level circuit breaker.

SEC rule 201 prohibits the shorting of covered securities which consist of NYSE, NASDAQ, and AMEX listed equities at the bid price if the price of the security has declined 10% or more from the previous day’s close.

32
Q

Limit Up Limit Down (LULD)

A

Ensures that prices of individual securities reflect fundamental price is based on supply and demand and do not move outside of established parameters based on errors or manipulative actions.

A 5-minute pause will occur if limit up or limit down reached with no trade for 15 seconds. The new reference price will be the opening price when the stock re-opens after the trading halt.

33
Q

Registering as a Market Maker

A

All broker-dealers that wish to register as a market maker must file an application with FINRA and demonstrate that they are in good standings with FINRA and that the firm meets the capital requirements to become a market maker.

Once approved, a broker-dealer must register each security it wishes to make a market in, prior to quoting that security. The firm will request to quote a security over the NASDAQ workstation and will receive same-day approval to enter quotes. The firm has 5 days to enter its initial quote.

Once a broker-dealer is approved as a market maker, it will be assigned a market participant identifier (MPID). The firm’s MPID is the symbol by which it bids and offers are identified in the NASDAQ market center execution system (NMCES).

34
Q

Due diligence file

A
35
Q

Piggybacking a quote

A

If an OTCBB security has been quoted by another dealer for a minimum of 30 days, the dealer does not have to fill out form 211 and may simply enter its own quote piggybacking the current dealer’s quote so long as:

  • The security has been quoted for at least 12 of the last 30 days (active)
  • There have been no more than four consecutive days without a quote (active)
  • There is at least one independent market maker quoting the security
36
Q

2-sided quote

A

NBBO will select the best bid & ask independently for display.

37
Q

NASDAQ order entry

A

A system order is entered in the NASDAQ system for display or execution. All orders must indicate a limit price and if the order is to buy, sell, or sell short the security for which the order is entered.

  • MIOC - market hours immediate or cancel
  • MGTC - market hours good till canceled
  • MDAY - market hours day
  • SHEX - System hours expire time
  • SIOC - System hours immediate or cancel
  • SGTC - System hours good till canceled
  • GTMC - good till market close

Market hours = 9:30am - 4pm
System hours = 7am - 8pm

38
Q

Locked and crossed markets

A

A locked market is one where the bid and offer are equal in price.

A crossed market is one where a bid is entered that is higher than the offer, or one where an offer is entered that is lower than the bid.

Market makers may not enter quotes that would lock or cross the market.

39
Q

Nominal quotes

A

Dealers who provide quotes over the phone, which are clearly indicated as being subject or nominal, cannot be held to trade at those prices.

40
Q

Quote vs Order

A

An order-driven market displays all the bids and offers for a security in the open marketplace or exchange. A quote-driven market only displays bids and asks of designated market makers and specialists for a specific traded security.

41
Q

Electronic Communications Networks (ECNs)

A

The electronic communication networks (ECNs) operate independently of FINRA. ECNs display and execute third-party orders and are allowed access to the NMCES. ECNs are widely used by both broker-dealers and institutional investors to display and execute orders.

There are 2 types:

  1. The ECN may be full participation
  2. The ECN may be a order-delivery
42
Q

Market Makers vs ECNs

A

A market center is:

  • An OTC market maker
  • A market maker that internalizes orders
  • An alternative trading system
  • A national securities association
  • A national securities exchange
43
Q

Market Centers

A

A market center is:

  • An OTC market maker
  • A market maker that internalizes orders
  • An alternative trading system
  • A national securities association
  • A national securities exchange
44
Q

Regulation NMS

A

SEC regulation NMS requires market centers to establish and enforce policies and procedures to ensure that trades do not get executed at inferior prices to those protected prices displayed in other market centers.

45
Q

Regulation ATS

A

Regulation ATS was introduced by the SEC in 1998 and is designed to protect investors and resolve any concerns arising from this type of trading system.

Regulation ATS requires stricter record-keeping and demands more intensive reporting on issues such as transparency once the system reaches more than 5% of the trading volume for any given security.

46
Q

Direct market access

A

Access to trade securities on an exchange or through an alternative trading system as a result of being a member or subscriber.

Must have risk management controls and supervisory procedures designed to ensure compliance with all industry rules.

47
Q

NASDAQ opening cross

A
48
Q

NASDAQ closing cross

A
49
Q

NYSE close

A
50
Q

NASDAQ halt cross

A

If a security is halted as a result of news or other corporate developments, the security will reopen with an opening cross.

The halt cross is designed to provide greater price discovery and allow all market participants and investors an opportunity to execute orders at the best available price once the news has been disseminated.

51
Q

Withdrawing quotes

A

A market maker may withdraw quotes for a security in two ways: voluntary or excused.

Voluntary (bad)

  • trading losses
  • influx of orders
  • lack of interest

Excused (must give 1 business day notice)

  • 3 or fewer work stations to cover for holidays & vacations. Excused for 5 business days.
  • Legal reasons - up to 60 days excused
  • Passive market making
52
Q

The Manning rule

A

Is a broker-dealer required to accept customer limit orders? No, they are not. But they do require special handling.

The Manning Rule details the requirements for special handling.

53
Q

Price improvement

A

The minimum price improvement is 1 cent.

54
Q

Order Audit Trail System (OATS)

A

OATS tracks an order through each stage of its life, from receipt to execution or cancellation to ensure orders are handled and routed in a timely manner.

Firms are required to submit daily electronic OATS reports to FINRA by 8am trade date + 1.

55
Q

Firm Quote Compliance System

A

Ensure market-makers are not engaged in a violation known as “backing away”.

56
Q

Automated Confirmation System (ACT)

A

Occurs once a trade is made.

Test point: Know what ACT does and does not do.

57
Q

Reporting trades to ACT

A

Test tip: Know the 10-second timeframe for reporting and 20-minute timeframe for accepting.

Memory tip: OTCBB & PINK OTC use Order Reporting Facility (ORF)

The price reported to ACT is the wholesale price exclusive of commissions & markups (the protected price).

58
Q

Trade Reporting and Compliance Engine (TRACE)

A
59
Q

Alternative Display Facility (ADF)

A

Operates from 8 AM to 6:30 PM daily.

Displays quotes only. Does not provide execution capabilities.

Electronic access through third-party connectivity providers.

Max of two-second turnaround time for an order. Max of 3-second communication between participants.

Only NASDAQ and 3rd market quotes (NYSE listed securities) are listed. OTCBB & PINK OTC do not trade on the ADF.

3 outages in 5 days = 20-day suspension.

60
Q

Dark Pools

A

A dark pool is a privately organized financial forum or exchange for trading securities.

Dark pools allow institutional investors to trade without exposure until after the trade has been executed and reported.

Dark pools are a type of alternative trading system (ATS) that give certain investors the opportunity to place large orders and make trades without publicly revealing their intentions during the search for a buyer or seller.

61
Q

TRF vs ACT

A

TRF is used to submit trade details to ACT

62
Q

Directed and preference orders

A

Preference borders – liability orders. Broker-dealer can determine market-maker to send trade. Market-maker must be inside market.

Direct orders may be liability orders (if the market-maker is inside market) or non-liability orders (away from market).

Liability begins when an order is presented to its quote for execution.