Flashcards in Chapter 9 Order Processing and Trading Markets Deck (35)
Loading flashcards...
1
Who Touches a Trade
Sales
Trading
Purchase and Sales
Cashiering Margin
Custody
Corporate Actions
Compliance
Accounting
same
2
Life Cycle of a Trade
Order Initiation
Order Review
Order Validation
Order Routing
Execution/ Match
3
The Order Audit Trail System (OATS), is what ___
an integrated audit trail of order, quote, and trade information
4
Order Tickets
Created at the time an order is received and includes:
Branch identifier
RR responsible for account and person accepting the order
Whether a purchase or sale
Sales must be marked long or short (if long, location must be included)
Symbol or description of security and quantity
Account number/name and type (e.g., cash or margin)
Time stamps -time of entry and execution (if filled)
Whether discretionary, solicited, or unsolicited
Orders must be approved by a principal on the day of entry
5
Items found on a Confirmation -
Remember:
firm capacity,
accrued interest,
commission, and
CUSIP number are items found on a confirmation
6
How Broker-Dealers Function
What is a Broker
What is a Dealer
A BROKER: Firm that executes a customer order by locating another party willing to take the other side of the transaction
Seller----ABC------>Buyer
A DEALER: Firm that executes a customer order by taking the other side of the transaction itself
P D M ------> Seller or
<------- -------- Buyer
7
Comparison of Services
Broker-Dealer vs Investment Advisor
Broker-Dealer
Earns money based on providing trading services
Charges based on account activity:
•Commissions
•Mark-ups
•Mark-downs
Investment Adviser
Earns money by providing investment advice
Charges may take different forms:
•Fee is based on assets under management
•Hourly fee
•Commission plus fee
8
Soft Dollar Arrangements
Practice in which an investment adviser (IA) receives research or other services from a B/D in exchange for order flow
Ultimately, what the IA receives as soft dollars must benefit its clients
Acceptable vs Unacceptable
Acceptable vs. Unacceptable:
Research reports (in-house and third party)
Access to analysts
Portfolio analysis software
Subscription to industry trade publications
Attendance cost for a securities conference/seminar
Office space
Accounting fees
Advertising/marketing expenses
Travel reimbursement
Professional licensing fees
Subscription to mass-marketed publications (e.g., WSJ)
1
9
Types of Orders
Market order :
Customer wants to buy or sell
Order is immediately executed at the best price available
Customer specifies the security and size of the order only
Execution is immediate
10
Types of Orders
Limit order :
Limit order :
Customer only wants to buy or sell at a set price or better
Order is only executed if the price can be met
•Buy limits --at set price or lower
•Sell limits --at set price or higher
Customer specifies the security, size, and price
Execution is depending on which way the market moves. If nothing done - nothing done notice sent
11
Order Disclosures
Limit orders may be either Day orders or Good ‘Til Cancelled (GTC) orders
SAME
12
All orders are assumed for normal market hours (9:30 a.m. to 4:00 p.m. ET)
A client may request Pre-market or Post-market exposure
Clients requesting this must be provided with special risk disclosures
All unfilled GTC orders must be printed on client statements
13
Stop Orders
Used to limit a loss or to protect a gain on a stock position
Investors would rather not have execution
Long Stock Position
Hope:
Fear:
Need:
Short Stock Position
Hope:
Fear:
Need:
14
The 5% Policy
A guideline, NOT a rule
Certain transactions may justify a higher mark-up, while there are others times where 5% is too high
•Considerations:
•Type of security involved (equity or debt) •Security availability
•Price
•Amount of money involved
•Pattern of mark-ups
•NOT type of client or whether the firm will profit
The policy excludes:
Trades involving securities sold by prospectus or offering circular (e.g., new issues and mutual funds)
same
15
Red Flag Issue
A trader at your firm has a consistently winning record in several options trades placed over the last month. You notice that many of these derivative trades are in the same stocks that are being accumulated by one of the firm’s largest institutional accounts. Is the trader guilty of insider trading?
same
16
Trading Violations
Front-running
Insider trading
Trading ahead of research reports
Matched orders
Backing away (not honoring a firm quote)
Charging mark-up and commission on the same trade
same
17
Red Flag Issue
An institutional client has a pattern of making very large purchases in the final minutes of trading. What is your concern?
Marking the close
18
Purchase and Sales Department
Responsibilities include:
-Recording of executions
-Matching of orders to fills
-Creating client confirmations
-Creating contra-broker comparisons
-Booking trades
-Researching differences
-Clearing trades (Locked in or affirmed at NSCC)
-Researching Don’t Know (DK) notices
19
Handling Errors
Error Account
Maintained by all B/Ds; used if the firm or an RR executes a trade in error(wrong security/quantity or wrong side of market)
To place trades in the account, principal authorization is required
Clients may refuse trades if their instructions were not followed (e.g., failing to execute at the client’s limit price or better or buying more than ordered)
To correct the error, a principal must be consulted
B/Ds are not responsible for errors caused by the client (e.g., placing order for wrong stock or failing to cancel an order)
If client receives an erroneous trade report, actual price is binding
same
20
Red Flag Issue
Several days after settlement, a trader at a correspondent firm is habitually moving trades in and out of its error account. As a senior operations professional at the clearing firm, what are your concerns?
check slides
21
Trade Reporting and Compliance Engine (TRACE)
Facilitates the mandatory reporting of secondary market trades in eligible what type of securities
fixed income securities
22
TRACE-eligible securities:
Depository-eligible, U.S. dollar-denominated debt, such as:
•Investment or non-investment grade debit
•Certain types of debt issued by U.S. and/or foreign corporations
•Agency securities guaranteed by the U.S. government
Other Reporting Systems
System -- Type
-Trade Reporting Facility (TRF) -- Nasdaq securities
-Over-the-Counter Reporting Facility (ORF) --OTCBB and Pink Market securities
-Trade Reporting and Comparison Service (TRACS) -- NMS securities quoted by ADF participants
23
Reporting Requirements
When systems are open, trades must be reported within the appropriate time frame:
For TRACE –within 15 minutes
For equity Systems, such as the TRF –within 30 seconds
Trade Corrections
When is the Trade Correction? - Same Day as Execution --- No/Was
Later Date than Execution
Which Function is Used? --- As/Of
24
Brokerage Arrangements
Give-up relationship
When B/D 1 reports and locks in trades on behalf of B/D 2 and reports the trades to the Trade Reporting Facility (TRF)
B/D 2 agrees to accept and honor trades reported on its behalf
If not reported appropriately, both firms are responsible
To establish the relationship, both B/Ds must file the appropriate forms with Nasdaq
25
Brokerage Arrangements
Step-out relationship
When a B/D, who has previously executed a trade, allocates all or part of the trade to another B/D for clearing purposes
A clearing-only report is submitted to the TRF
Used to transfer the customer’s position, but not report the trade
26
9-1 A customer would like to sell shares of PEP out of his account. Which of the following choices is NOT noted on the order ticket?
a. Customer's account number
b. Solicited or unsolicited
c. the capacity of the broker dealer
d. the location of the security
b. solicited or unsolicited is NOT
that is on a confirmation
27
9-2 An order that becomes a market order to buy or sell securities once a specified price is attained or passed is:
a. Limit order
b. Market order
c. Fill - or - kill
d. stop order
d. Stop order - becomes a market order to buy or sell securities once a specified price is attained or passed
28
9-3 An investment advisor that sells a security from its own inventory is action as an
a. Agent
b. Principal
c. Agent in an agency cross transaction
d. Financial intermediary in an unregistered capacity
b. Principal
29
9-4 A subject quote means subject to:
a. Confirm
b. Volatility
c. Cancellation
d, the 5% markup policy
A .Confirmation
A subject quote is one that is subject to confirmation and is not firm. Firm quotes are given without a qualifier, meaning that both parties are willing to trade at the agreed price without any objections
30
