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Flashcards in Chapter 9 Order Processing and Trading Markets Deck (35)
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Who Touches a Trade

Purchase and Sales
Cashiering Margin
Corporate Actions




Life Cycle of a Trade

Order Initiation
Order Review
Order Validation
Order Routing
Execution/ Match


The Order Audit Trail System (OATS), is what ___

an integrated audit trail of order, quote, and trade information


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


Items found on a Confirmation -


firm capacity,
accrued interest,
commission, and
CUSIP number are items found on a confirmation


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


A DEALER: Firm that executes a customer order by taking the other side of the transaction itself

P D M ------> Seller or
<------- -------- Buyer


Comparison of Services

Broker-Dealer vs Investment Advisor

Earns money based on providing trading services
Charges based on account activity:

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


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)


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


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


Order Disclosures
Limit orders may be either Day orders or Good ‘Til Cancelled (GTC) orders



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


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

Short Stock Position


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
•Type of security involved (equity or debt) •Security availability
•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)



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?



Trading Violations
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



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


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


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



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


Trade Reporting and Compliance Engine (TRACE)
Facilitates the mandatory reporting of secondary market trades in eligible what type of securities

fixed income securities


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


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


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


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


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


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


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


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


9-5 One difference between Nasdaq Level 2 and Level 3 service is that :

d .Level 3 is available only to the market makers in particular securities