CH 10 SEC Trading Rules

Question 1

What is a protected quote related to the Order Protection Rule (NMS Rule 611)?

Answer 1

Any quotation that is immediately accessible through an automated execution system.

Question 2

True or False: A volume-weighted average price (VWAP) order is usually placed by an institutional investor.

Answer 2

TRUE

Question 3

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than how old?

Answer 3

Less than 24 hours old.

Question 4

On a quarterly basis, BDs must disclose their routing practices for what type of orders in NMS securities?

Answer 4

Non-directed orders.

Question 5

When must a BD fill a client’s limit order after executing a trade for its own account at the same or better price?

Answer 5

Immediately (within 60 seconds).

Question 6

True or False: A market maker must immediately display any client order that improves its quote.

Answer 6

TRUE

Question 7

When may the sell order ticket be marked long for a client with a futures contract who has decided to sell stock?

Answer 7

When the client is notified that the futures contract will be settled resulting in delivery of shares.

Question 8

What must exist for a firm’s trading desk to buy at a price that would fill a client order of another desk?

Answer 8

Information barriers.

Question 9

Who publishes a list of all threshold securities?

Answer 9

A self-regulatory organization (SRO).

Question 10

Is this a not-held order? “Sell some of my RST position today if the news is bad.”

Answer 10

No, because the client did not specify the number of shares to sell.

Question 11

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.65?

Answer 11

No, because a bid of $12.65 would cross the inside offer of $12.62.

Question 12

What securities are included in monthly market center reports?

Answer 12

Nasdaq and exchange securities for which information is sent through an automated quotation system.

Question 13

True or False: A sell order ticket may be marked long if the client or his agent has title to the security.

Answer 13

True. A BD must be in possession of a security or have reason to believe the client is long and will deliver promptly.

Question 14

What must a firm do if it holds Jim’s order and buys for its own account at a price equal to or better than Jim’s?

Answer 14

Fill the client’s order at the same price that it received.

Question 15

True or False: Under NMS Rule 611, the Order Protection Rule, a manual quotation on the NYSE floor is protected.

Answer 15

False. Protected quotes are those that may be immediately accessed through an automated system.

Question 16

How often are the circuit breakers that are used to determine the triggering of a trading halt reset?

Answer 16

Daily.

Question 17

True or False: Clients must provide verbal or written consent to a BD concerning payment-for-order-flow arrangements.

Answer 17

False. BDs are, however, required to provide disclosure of the arrangement.

Question 18

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.583?

Answer 18

No. If NMS stock is priced above $1.00, it may NOT be quoted in increments less than $0.01.

Question 19

Without causing a regulatory violation, why may a presented order not be honored by a market maker?

Answer 19

Either before or at the time of order presentation, the BD executes an order and will immediately revise its quote.

Question 20

Orders to sell all exchange-listed and over-the-counter equities must be marked _____ or ______.

Answer 20

Orders must be marked long or short.

Question 21

The inside market for an NMS security is .90 - .95. At what price levels may a BD accept indications of interest?

Answer 21

If NMS stock is priced less than $1.00, it may be quoted in increments no less than one hundredth of a cent ($0.0001).

Question 22

A market maker is quoting ABC at 21.05 - 21.35, 15 x 50. What happens if it accepts a client order to sell 500 at 21.35?

Answer 22

If client interest is 10% or less of the market maker’s size (de minimis), no change is made (5,000 x 10% = 500 sh.).

Question 23

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 500 at 21.35?

Answer 23

Assuming the market maker is at the inside, it adds the client’s interest to its displayed size (21.05-21.35, 15 x 15).

Question 24

A market maker quotes a stock at 14.50 - 15.00, 3 x 5. At what price would a customer’s market order to sell be filled?

Answer 24

Customer market orders to sell are filled at the bid price of 14.50.

Question 25

True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.

Answer 25

False. She must have EXERCISED the options, rights, or warrants.

Question 26

A BD sends an order to Market Center A whose offer is $14.85, while Market Center B's offer is $14.83. Is this allowed?

Answer 26

No. The order should be routed to Market Center B, which is quoting the stock at a superior (lower) price.

Question 27

To enable them to compete with market makers, customer limit orders are subject to ________ rules.

Answer 27

Display rules.

Question 28

A BD holds a client order to sell 500 shares at $21. What would trigger an obligation to fill the client's order?

Answer 28

The BD selling from its own account at $21 or higher.

Question 29

What orders are exempt from the Limit Order Protection Rule?

Answer 29

Orders from institutional accounts and orders of 10,000 shares or more worth at least $100,000.

Question 30

As defined in the Limit Order Display Rule, what is a block-sized order?

Answer 30

An order for at least 10,000 shares or with a value of at least $200,000.

Question 31

True or False: Under NMS Rule 610, a market center may charge participants a fee for accessing its quotations.

Answer 31

True; however, the fee must be reasonable.

Question 32

In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?

Answer 32

Easy to borrow (called the locate requirement).

Question 33

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it receives a client order to buy 300 at 21.10?

Answer 33

If the market maker's quote is improved, it must display the client's interest. Its quote is now 21.10 - 21.35, 3 x 10.

Question 34

True or False: SEC Rule 606 requires a BD's quarterly order flow report to include Pink Market equities.

Answer 34

False. Pink Market and other OTC equities are not included.

Question 35

Do-not-display requests should be ___________ and the request may be on a _______________ basis.

Answer 35

Documented and the request may be on a trade-by-trade basis.

Question 36

What are some exemptions to the Limit Order Display Rule?

Answer 36

Order immediately executed, order sent to a BD or ECN that complies, block order, or customer requests 'do not display'.

Question 37

What type of order only permits discretion related to the time and/or price of execution?

Answer 37

A not-held order.

Question 38

What is a threshold security?

Answer 38

A reporting company's stock that has substantial fail-to-deliver positions in existence for 5 consecutive business days.

Question 39

Describe payment-for-order-flow.

Answer 39

A BD practice of providing monetary incentive (cash, rebates, or discounts) for routing orders to a BD or exchange.

Question 40

What step is required if a fail-to-deliver position has been open for 13 consecutive settlement (business) days?

Answer 40

Mandatory close-out.

Question 41

True or False: Firm at the inside market receives a client limit order equal to the firm's quote must add to its size.

Answer 41

True. It must increase the size of its quote, unless de minimis (order size is 10% or less of MM's current size).

Question 42

What must exist for the Manning Rule to not apply to other trading desks of a BD?

Answer 42

Information barriers.

Question 43

True or False: Order-routing disclosure requirements apply to all reporting parties.

Answer 43

True. Both market makers and order-entry firms must provide disclosures.

Question 44

To mark a sell order ticket long, any options, warrants, or rights owned must have been __________ before the sale.

Answer 44

Exercised before the sale.

Question 45

If a BD receives a client order to sell 20,000 BBB at $54, when may its proprietary trader sell BBB at the same price?

Answer 45

When the firm implements a system to prevent the misuse of information regarding client orders (information barriers).

Question 46

What is calculated between a beginning and ending period, based on an average of trades executed during that period?

Answer 46

The volume-weighted average price (VWAP).

Question 47

The inside market for an NMS security is 12.56 - 12.62, 10 x 15. May a BD place a bid at $12.58?

Answer 47

Yes. The BD's bid at $12.58 would serve to narrow the spread.

Question 48

Block trades of ________shares or more, or $___________ or more, are exempt from the Limit Order Display Rule.

Answer 48

10,000 shares or more, or $200,000 or more.

Question 49

If client consent is obtained, a firm may trade along with a client at the same price with what types of client orders?

Answer 49

Orders designated as not-held for institutions or with large orders (10,000 sh. or more with value of at least $100,000).

Question 50

Is this a not-held order? "Buy 500 shares of XYZ this morning if it looks good."

Answer 50

Yes.

Question 51

Sell order tickets are marked long when clients have unconditional contracts to buy, but the trades have not ________.

Answer 51

Settled.

Question 52

When is a VWAP order entered?

Answer 52

Prior to the determination of the actual price; therefore, the BD guarantees the VWAP as of a certain period.

Question 53

To whom and when must the routing firm disclose details of any payment-for-order-flow practices?

Answer 53

Clients must be informed in writing at the opening of an account and annually thereafter.

Question 54

NMS Rule 612 generally prohibits market participants from displaying orders in pricing increments of less than ________.

Answer 54

One cent.

Question 55

How is the volume-weighted average price (VWAP) calculated?

Answer 55

By totaling the dollar value of each trade (shares x price) divided by total number of shares traded over a given period.

Question 56

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it accepts a client order to sell 700 at 21.30?

Answer 56

If the market maker's quote is improved, it must display the client's interest. Its quote is now 21.05 - 21.30, 15 x 7.

Question 57

Describe a non-directed order.

Answer 57

An order that does not have a specific market center designated by the client and is chosen by the BD.

Question 58

To be considered a threshold security, excessive fails-to-deliver must occur for how many consecutive settlement days?

Answer 58

5 consecutive settlement days.

Question 59

A client who is long 500 shares of ABC enters a single order to sell 600 shares of ABC. Is this a short sale?

Answer 59

Yes. If entered on one ticket, the client is net short 100 shares.

Question 60

What steps are required for a firm to obtain an exception from the Customer Limit Order Protection Rule to apply?

Answer 60

Before an order is accepted, it must obtain client consent and it must disclose that it may potentially trade ahead.

Question 61

True or False: Non-displayed orders are NOT subject to price protection rules.

Answer 61

FALSE

Question 62

A BD holding a client's buy limit order is required to fill the client's order after doing what for its own account?

Answer 62

Buying at the same or lower price for the firm's account.

Question 63

True or False: Market makers are exempt from the borrowing requirement of Regulation SHO.

Answer 63

FALSE

Question 64

A client who is long 500 shares of XYZ and short 600 shares of XYZ is net short how many shares?

Answer 64

100 shares.

Question 65

What does the Order Protection Rule (NMS Rule 611) prohibit?

Answer 65

A market center's ability to trade-through the best (protected) quote in an automated market.

Question 66

For NMS stocks priced at $1.00 or greater, what access fee may market centers charge market participants?

Answer 66

$0.003 per share.

Question 67

What is the purpose of Regulation SHO?

Answer 67

To regulate the practice of selling short.

Question 68

Explain the Trade Ahead Exception to the Firm Quote Rule which allows a market maker (MM) to not honor presented orders.

Answer 68

An MM executes an order either before or at the time of presentation and revises its quote immediately upon completion.

Question 69

What does Regulation SHO regulate?

Answer 69

Short sales.

Question 70

To not violate the Firm Quote Rule, when must a market maker have communicated a change to its quote (price or size)?

Answer 70

Prior to the presentation of an order.

Question 71

For NMS stocks priced at less than $1.00, what access fee may market centers charge market participants?

Answer 71

0.3% of the dollar value of the quote.

Question 72

How often must BDs publish reports summarizing their order routing practices?

Answer 72

Quarterly.

Question 73

Though acting in good faith, a customer sells securities, but does not deliver. When must the BD close out the trade?

Answer 73

All fails-to-deliver must be closed out within 35 calendar days.

Question 74

Rather than displaying an order, what alternatives are available to firms?

Answer 74

Execute it upon receipt or deliver it to an ECN or another firm that is complying with the Limit Order Display Rule.

Question 75

To be a threshold security, how many shares must be in a failing position?

Answer 75

10.

Question 76

When must a BD close out a trade if a customer sells securities but does not deliver?

Answer 76

All fails-to-deliver must be closed out within 35 calendar days.

Question 77

What alternatives are available to firms instead of displaying an order?

Answer 77

Execute it upon receipt or deliver it to an ECN or another firm that is complying with the Limit Order Display Rule.

Question 78

How many shares must be in a failing position for a security to be considered a threshold security?

Answer 78

10,000 shares or more.

Question 79

Is the sale of 1,000 shares of ABC stock by a client who is long ABC call options a short sale?

Answer 79

Yes. For the sale to be marked long, the options would need to be exercised prior to the sale of the stock.

Question 80

What is it called when a client designates a specific market center for order routing?

Answer 80

It is a directed order.

Question 81

How do you calculate the VWAP if 6,700 shares traded with a total value of $268,536?

Answer 81

$268,536 ÷ 6,700 shares = $40.08.

Question 82

Is there an exception available under the Manning Rule for a client order to buy 10,000 shares for $12.50 per share?

Answer 82

Yes. Trade exceptions may apply for large orders (10,000 shares or more and a dollar value of at least $100,000).

Question 83

What are the two ways order tickets can be marked when selling securities?

Answer 83

Long (selling shares that are owned) or short (selling stock that is being borrowed).

Question 84

True or False: The Order Protection Rule (NMS Rule 611) only applies during extended trading hours.

Answer 84

False. The Order Protection Rule applies during normal trading hours (9:30 a.m. to 4:00 p.m. ET).

Question 85

Who can place not held orders?

Answer 85

Not held orders may be placed by both retail and institutional customers.

Question 86

True or False: Market makers are prohibited from trading ahead of customer limit orders.

Answer 86

TRUE.

Question 87

What is the violation for a market maker failing to honor its firm quote?

Answer 87

Backing away.

Question 88

True or False: A request to not display an order must be individually negotiated with the client.

Answer 88

TRUE.

Question 89

True or False: The Locate Requirement of Regulation SHO applies when a sell order ticket is marked long or short.

Answer 89

False. The Locate Requirement only applies when a sell order ticket is marked short.

Question 90

If a client is long 500 shares of ABC and short 400 shares, what is their net long position?

Answer 90

A client is only net long 100 shares.

Question 91

How does NMS Rule 611, the Order Protection Rule, seek to prohibit trade-through practices?

Answer 91

By requiring a market center to route orders to the automated market displaying the best price.

Question 92

True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.

Answer 92

False, the convertibles must already have been TENDERED for conversion.

Question 93

What is the practice called when a BD sends client orders to an exchange for execution and is rebated for executed trades?

Answer 93

Payment-for-order-flow.

Question 94

What would trigger a BD's obligation to fill a client's order to buy 500 shares at $15?

Answer 94

The BD purchasing for its own account at $15 or lower.

Question 95

True or False: Trade confirmations must disclose details of trades effected through a payment-for-order-flow agreement.

Answer 95

TRUE.

Question 96

What is considered a large order under the Customer Limit Order Protection Rule?

Answer 96

10,000 shares or more unless the dollar value is less than $100,000.

Question 97

What information must be included in a BD's quarterly routing report?

Answer 97

The security (NYSE, AMEX, Nasdaq, or option) and the market center to which the orders are routed.

Question 98

How should Sally mark her sell order ticket after converting her XYZ bonds?

Answer 98

The order ticket may be marked long.

Question 99

True or False: Do-not-display requests may NOT be entered by clients.

Answer 99

FALSE.

Question 100

At what price would a customer's market order to buy be filled if a market maker quotes a stock at 14.50 - 15.00?

Answer 100

Customer market orders to buy are filled at the ask price of 15.00.

Question 101

What type of reports are market centers required to create regarding order execution quality?

Answer 101

Market centers are required to create monthly reports disclosing the measures of the quality of order execution.

Question 102

Where is a BD required to post its order routing information?

Answer 102

On its Web site, free of charge and accessible to the public.

Question 103

How many shares must a market maker fill at the bid price if quoting stock at 14.50 - 15.00?

Answer 103

The market maker is obligated to fill a minimum of 300 shares.

Question 104

Will a market maker's quote change upon receipt of a client order to buy 300 shares at 17.42 if quoted at 17.40-17.45?

Answer 104

Yes, it changes to 17.42 - 17.45 3 x 7.

Question 105

What does the Manning Rule relate to?

Answer 105

Customer limit order protection.

Question 106

True or False: A market maker publishing a firm quote is obligated to honor the price and the number of shares quoted?

Answer 106

True. A BD providing a firm quote is obligated to honor both the price and size displayed.

Question 107

Under the Limit Order Display Rule, how quickly must orders that improve the market maker's quote be displayed?

Answer 107

Immediately, but no later than 30 seconds.

Question 108

How long must fails-to-deliver in threshold securities exist before they must be closed out?

Answer 108

Fails-to-deliver must be closed-out after 13 consecutive settlement days.

Question 109

Does a sell order of 300 shares of XYZ today if it starts to rise require prior discretionary authorization?

Answer 109

No, this is a not held order.

Question 110

When does the obligation to comply with the Customer Limit Order Protection Rule apply?

Answer 110

During both normal and extended trading hours and when orders are sent to an ECN (or other entity) for execution.

Question 111

Can a BD accept a client order to buy an NMS stock at $.956?

Answer 111

Yes. For NMS stocks that are priced less than $1.00, orders may be accepted at up to four decimal places.

Question 112

How often must market centers publish reports of the efficiency of executions?

Answer 112

Monthly.