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Series 7 > CHAPTER 16 - TYPES OF ORDERS AND QUOTATIONS > Flashcards

CHAPTER 16 - TYPES OF ORDERS AND QUOTATIONS Flashcards

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1
Q

Price Restricted Orders

A

Market Order
Limit Order
Stop Order
Stop Limit Order

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2
Q

Market Order

A

Executed right away at the market price

No price limits

Priority over all other types of orders

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3
Q

Limit Order

A

Buy or sell at a specific price or a price better than the limit

Identifies max a customer is willing to pay or a minimum price the customer is willing to sell

Filled as soon as possible at market price but is restricted to the limit price or better

No guarantee the order will be filled

Buy is at the limit or lower
Sell is at the limit or higher

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4
Q

Lengths and Risks of Limit orders

A

Lengths:
Day Order
GTC (open order)

Risks:
Entering limit opens you to miss the change to buy or sell

Stock ahead: Limits orders are arranged by when they were received so there is a chance your order is not filled even if the price is met

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5
Q

Stop Orders

A

Trigger - trigger transaction at or through the stop activates the trade
Execution - stop order becomes market order and is executed

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6
Q

Buy Stop Order

A

Protects a profit or limits loss in short stock position

Price is entered above the CMV and is triggered when market price trades at or trades through stop price

Can also be placed to capture upside when resistance is broken

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7
Q

Sell Stop Order

A

Protects a profit or limits loss in long stock

Price is entered below the CMV and is triggered when market price trades at or through stop price

Can also be placed to capture downside support breakthrough

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8
Q

Stop Limit Order

A

Once triggered becomes a limit order

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9
Q

Reducing Orders

A

Buy limit orders, sell stop orders, and sell stop limits have special rules for ex dividend dates

Stock price opens lower by amount of dividend, so the orders are reduced by that amount to not create accidental execution

Do Not Reduce (DNR) orders do not take this into account

Only orders placed below market price are automatically reduced

Order are also adjusted for stock dividends or splits

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10
Q

Round Lot

A

100 Shares

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11
Q

Time Sensitive Orders

A

Day (always this unless specified)
GTC (set to 3-6 months or whenever cancelled)
Opening or Close (executed at the start or close)
Not held (no time or price execution required, but gives broker authority to decide)
Fill or Kill (complete immediate execution or is cancelled)
IOC (execution or partial execution and then is cancelled) this is immediate or cancel
AON (needs to be entirely filled within time limit or cancelled)

One Cancels the Other - pair of orders where if one is filled the other is cancelled

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12
Q

What order is not on a MMs display book?

A

Market order because it is filled right away

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13
Q

Are stop orders taken on exchanges?

A

May be depending on exchange

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14
Q

Are stop orders taken on OTC

A

accepted by some

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15
Q

Bids, Offers, and Quotes

A

Current bid is highest price a buyer is willing to pay
Current offer is highest price a seller is willing to sell

This is INSIDE MARKET

Difference is known as the spread

Dealers buy at the bid
Dealers sell at the ask
Dealers receive the spread

Customers buy at the ask
Customers sell at the bid

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16
Q

Net Basis

A

Executed price that includes brokers fee or commission

Cannot charge both commission and markdown, must be one or the other

5% guideline for commissions, markdowns and markups

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17
Q

Agent v Principal

A

Principals sells the stock sell at ask price and add markup

Agents sell at ask price and charge commission

Principal buying stock at the bid price and charge markdown

Agent buys at bid price and charges commission

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18
Q

If spread is 42.25 - 42.5 and the markdown is 0.30, what is the price to buy for a customer?

A

Price to buy would be $42.80

Price to sell would be $41.95

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19
Q

Quotes

A

Firm Quote - Price quote including volume a MM is obligated to buy or sell a specific amount at a specified price
Minimum volume is 100 shares or 5 bond, price and volume are guaranteed

Subject or Nominal Quotes - non-binding quote where price is subject to change due to market conditions
More for hypothetical situations or quotes
“probably can buy for around $38.50” would be a nominal quote
Not firm and common for muni bonds because those are traded thin

Qualified Quotes - quote with qualifiers that lets dealer back away
Order size is too big or too thin and can be unstable
Workout quote is approximate figure to provide buyer or seller with indication or price, not firm quote
“Around 40-41” would be workout quote

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20
Q

What type of market is the OTC market?

A

Negotiated basis

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21
Q

52.15 - 52.27, 4 x 6

A

MM is willing to buy 400 shares at 51.15

MM is willing to sell 600 shares at 52.27

THIS IS A FIRM QUOTE

MM can revise firm quote but CANNOT back away from the quote

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22
Q

MM will offer 20,000 shares at $20.22 for next 10 minutes is what type of quote?

A

Firm quote because it includes price, time, and amount

Only ask is provided because customer only wants to buy

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23
Q

Quotation Spread

A

Spread is influenced by:
size
financial condition of issuer
market activity of issue
market conditions

more active a security, the more narrow the spread

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24
Q

Best execution of customer orders

A

Need to use reasonable diligence to find best market for security for customer and need to think about:
- character of market for security
- size and type of transaction
- number of markets checked
- accessibility of quotation
- terms and conditions of order the result in transaction as communicated to member

need to do your best job to find best priced securities and sell them at the best price

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25
Securities with limited quotations or pricing
Best execution rule applies to all orders Need to ensure you have the best price with securities with limited pricing Need to find other sources to find different quotes and more liquidity
26
Interpositioning
Member firm cannot place third party between itself and best available market Cannot route an order through another firm where member can route to directly Need to go to best market available Can be justified if it results in better execution for customer (lower price)
27
OTC Quotes Testable Items
Markups and markdowns are charged when MM is acting as principal Firms quotes are good for number of shares displayed Nominal quotes can be given for informational purposes but need to be labeled Relatively wide spread indicates thin market Securities identified as OTC may not always have displayed info available
28
Quotation Dissemination
Once registered with FINRA, MMs display their quotes and interact with other MMs
29
Short Sale Rules
BD lends securities to customer and short seller ultimately has to return the shares Short seller is responsible for any dividends paid while short position exists, short seller has to give dividend to buyer Needs to happen in a margin account
30
Regulation SHO
Firm must locate stock for borrowing before execution of short sale SHO prohibits naked short selling
31
Insider Short Sale Regulations
Securities Exchange Act of 1934 prohibits directors, officers, insiders from shorting their company stock
32
Sell Order Tickets
Need to specify if you are sell long or sell short
33
When are you long a security?
you have: - title to it - have purchased security or enter into agreement to purchase it - own convertible security - has option to buy it
34
Borrowing Securities
Securities can be borrowed from: - member firm on behalf of customer - margin customer of that member firm - other member firms - institutional investors
35
Mark to Market
Making end of day adjustments to customers margin account as price of security changes If price increases then the equity in the account goes down for a short sale but opposite when share value drops
36
Shorting Bonds
Not easy to cover short for most muni bonds because there is a limited number and it is too thin No one shorts muni bonds really
37
Types of Margin Accounts
Long Margin Accounts - customer buy securities and pay interest on money borrowed (borrow money) Short margin account - stock is borrowed and sold short, letting the customer to profit if value declines (borrow stock)
38
Margin Account Agreements
Customer needs to sign margin agreement before trading can begin - (3 parts) Credit agreement - terms of credit with interest computation Hypothecation agreement - gives BD permission to pledge customer securities as collateral, all securities must be held in street name BD then re-hypothecate securities as collateral for a loan from the bank BDs are limited to pledging 140% of customers debit balance as collateral Loan consent form - gives permission to firm to lend customer securities to others
39
Interest paid by margin customers
Is variable rate based on broker call rate
40
Risk Disclosure
Before or at time of opening margin account, member firm must provide customer with a margin disclosure statement and then on an annual basis, discloses: - customer can lose more than deposited - customer are not entitled to choose which securities are sold to meet a call - customers are not entitled to an extension to meet a margin call - firms can increase their in-house margin requirement without advance notice
41
What needs to be signed?
Credit agreement Hypothecation agreement
42
Reg T
Securities Exchange Act of 1934 gives Fed the authority to regulate credit Need to have 50% of price of transaction within 2 business days of regular way settlement (T+1) Deposit must be done within 3 days of transaction Applies to both cash and margin accounts
43
Margin v Marginable
Margin is amount of equity that must be deposited to buy securities Marginable are the securities that can be bought on margin
44
What can be bought on margin?
Exchange listed stocks and bonds Nasdaq non-Nasdaq OTC issues approved by Fed Warrants
45
What CANNOT be bought on margin?
Put and calls Rights non-Nasdaq OTC issues NOT approved by Fed Insurance contracts
46
What CANNOT be bought on margin but can be used as collateral after 30 days?
Mutual funds New issues
47
Deadlines for meeting margin calls
Need to meet initial margin requirement no more than 2 business days after settlement date If payment is late, designated examining authority (DEA) may apply to them to extension If no extension is received by third business day, firm must sell out of securities and freeze account for 90 days Customer must have full payment in frozen account to purchase securities, BD may disregard any sum not exceeding $1,000 Freeriding is when securities are bought and sold without making payment and is prohibited in cash and margin accounts. Penalty is 90 days frozen To avoid freeze: - have sufficient funds in account - swap checks on settlement date
48
Exempt Securities
US Treasury securities Gov agency issues Muni securities
49
Initial Requirement
Customer are required to deposit minimum amount of equity for first purchase in margin account Needs to be 50% of market value
50
Deposit rules initial margin
$0-$2,000: 100% $2,000-$4,000: needs to be $2,000 $4,000+ is 50%
51
Margin Accounting
Marking to Market - check status of equity in an account and is done every business day
52
Long Margin Accounting (customer owns security)
Long Market Value (LMV) - CMV of the position Debit Register (DR) - Amount of money borrowed Equity (EQ) - Net worth in margin account LMV - DR = EQ
53
200% of a stock for initial margin
If you have $20k of a stock and use that as collateral to borrow $20k, if you deposit 200% that would be another $20k that you put in making the amount borrowed 50%
54
Maintenance Requirement
When price changes, BD must mark to market positions to ensure enough equity stays in the account Customer account must always meet maintenance requirement of FINRA which is 25% of LMV Reg T = 50% of LMV Maintenance = 25% of LMV
55
Restricted Accounts
If equity is less than Reg T or 50% but greater than maintenance of 25%, the account is restricted Rules if restricted: - no requirement to take any action (unless dropping below maintenance) - to purchase additional securities, put up 50% - to withdraw, must deposit cash equal to 50% of value of securities to be withdrawn - if securities are sold, half of proceeds must be retained to reduce debit balance (this is called retention requirement), 50% are credited to special memorandum account
56
Maintenance Requirements
Get a margin maintenance call is below minimum maintenance requirement Failure to meet the call results in BD liquidating securities to bring account back to minimum Margin maintenance can be met in 2 ways: - deposit cash - fully paid margin-able securities
57
House minimum
BD having higher than FINRA maintenance requirement
58
Maintenance Call
Market value maintenance formula = DR / 0.75
59
Excess Equity and SMA
Excess Equity (EE) in a margin account is amount of equity exceeding Reg T Don't forget Reg T increases as market value increases SMA rule: every $1 increase, $0.50 of SMA is created EE creates SMA or buying power, SMA is a line of credit a customer can borrow from SMA = greater of EE or amount in SMA
60
What else creates SMA?
Non-required cash deposits- if customer deposits cash that is not required to meet margin call, full amount reduces debit and is credited to SMA Dividends - dividends received are added to SMA (customers must remove within 30 days or it is added to equity) Loan value - if customer makes deposit of margin-able stock, stocks loan value is credited to SMA, credit is 50% of CMV Sale of stock - when stock is sold, 50% is credited to SMA
61
Using SMA
Line of credit, can use to withdraw cash or meet margin requirement If withdrawn, it reduces equity and increases debt If used to buy securities, you can use $1 of SMA to buy $2 of securities increasing debt, and LMV and EQ SMA cannot be used to meet maintenance margin call
62
What is the maintenance margin for short margin?
30%
63
How much SMA is created in long margin vs short margin?
$0.50 is created for every $1 of increase in market value $1.50 is created for every $1 decrease in market value
64
NYSE
Called the big board, it is the largest US listed exchange Exchange listing requirements - listed securities must satisfy the requirements, usually corp must have minimum number of publicly held shares and shareholders, only companies of significant size and public ownership qualify for NYSE Dual listing is listing on multiple exchanges
65
DMMs
Facilitate trading in specific stocks to maintain fair and orderly market in those stocks acting both as brokers and dealers Act as an auctioneer
66
Auction Market
Exchange securities are in an auction market Also sometimes called double auction market because buyers and sellers call out their best bids and offers to get business Bid needs to be $0.01 higher than current best bid and same with offer Highest bids and lowest offers get first considerations DMMs award trades in the following order: 1 - priority (first one in) 2 - precedence (largest order) 3 - parity (random)
67
Volatile Markets
Circuit breaker rules protect against uncontrolled drops in the market Market wide halt would be triggered if S&P500 dropped by specific percentages Level 1 = 7% drop Level 2 = 13% drop Level 3 = 20% drop (at any time, trading will halt for rest of day) For level 1 and 2 Before 3:25pm: 15 minute halt At or after 3:25pm: trading continues Level 1 or 2 can happen more than once per day No trading during a halt but investor can cancel open orders
68
Arbitrage
Profit form temporary price differences Market arbitrage - some securities may trade between multiple different exchanges, people come in any buy lower price in one market and sell in another Convertible security arbitrage - convertible bonds, people may convert to sell at profit NOT illegal
69
COD Trades
Delivery vs payment and receipt vs payment are for institutional investors where delivery is made to third party (bank to hold money) Collect on delivery and payment on delivery transactions - member shall received name and address of agent prior to accepting order - each order accepted has noted whether it is POD - member shall deliver confirmation to customer no later than next business day - member shall obtained agreement from customer that customer will furnish its agent instructions with respect to receipt or delivery of securities involved up to 35 days to obtain payment if delivery is delayed because of mechanics of transactions
70
Can a DMM accept a not held order?
NO
71
Equity in a short margin situation
Short market value - CMV Credit register - amount of money in customers account Equity EQ = CR - SMV If shorting 1,000 shares at $70k, the CR = $105k or (70k + 35k) CR = EQ + SMV If the price declines, CR stays the same
72
FINRA maintenance requirements for long vs short positions
Long = 25% Short = 30%
73
Max value a short position can increase before maintenance call is issued
Total credit balance / 1.3
74
Minimum maintenance in short account
Exceptions to 30%: - stock trading under $5 a share, need 100% of SMV or $2.5/share - for stock trading at $5 or above, minimum is greater of $5.share of 30% (will only be 30% when SMV is above $16.67
75
Combined Equity
LMV + CR - DR - SMV = EQ
76
Options and margin
Need to have 100% to purchase options
77
Customer in long margin has MV of $12k, debit balance of $8k, and SMA of $2k How much can you withdraw?
Can withdraw $1k $12k * 25% = $3k Since you have equity of $4k, you cannot drop below $3k, so you can take $1k out
78
FINRA Reg T day for delivery of cash
3 business days
79
Does SMA decrease when market value decreases in long account?
NO Unaffected by market value decreases
80
If a customer agrees to lend their securities through loan consent agreement and the loaned stock pays dividends, what happens?
The customer lending their securities will receive the dividends, their account is credited with the dividends
81
When shorting a stock if below $2,000 what is the amount needed in the account?
$2,000
82
Does sale of securities and cash deposited impact the SMA?
YES
83
Can a stop order help protect unrealized gains on an existing long position?
YES
84
Will a decrease in market value cause a change in SMA?
NO purchasing a stock, increase in market value, or selling a stock would cause a change in SMA
85
Are short sale buyers informed that they are buying borrowed shares?
NO
86
What is marking to the market
Revaluing of securities held long or short in the account based on actual CMV of securities
87
Debit for long margin is what?
Debit is the DEBT
88
If customer sells $4k of a stock, what is the credit to the SMA?
$2k 50% of the proceeds are released if the account is restricted
89
Under Reg T, action by BD is not required when
Amount due does not exceed $1k
90
What trade triggered vs what trade executed a stop limit order
Triggered would be the stop order price Executed would be the limit order price
91
Not held orders are what
Orders where customers gives firms broker the discretion as to time or price NOT discretion
92
Member firm acting as agent routes an order through third party instead of going through MM, what is this?
Inter positioning it is a violation of getting best execution for client
93
Investors margin account has short value of $9k and credit balance of $13k Maintenance call will be triggered if short value increases above what?
$10k minimum maintenance is 30% for short margin maintenance level = 1.3 13,000/1.3 = $10,000
94
Investor is short 100 shares of XYZ at $52 a share 3 months later the price is at $58, at what price would a maintenance call be made?
$5,200 * 1.5 = $7,800 $7,800 / 1.3 = $6,000 30% $1,800 / $6,000 = 30%
95
What is the spread for a stock?
Difference between bid and ask
96
Customer buys stock for $5k but then stock goes up to $6k, how much does he have to put in?
$2,500 Reg T - 50%
97

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