I: Overview of the Industry Flashcards by Kevin Archer

Members of a clearing corporation that compares and settles its clients’ trades against those of opposing broker/dealers.

Clearing broker/dealer

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Do not deal in securities and do not have to register with the Securities and Exchange Commission. They are regulated by a different federal agency, the Commodity Futures Trading Commission (CFTC).

Commodity houses

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These firms transact business in such products as agricultural produce and lumber. They buy and sell futures on the products as well as deal in the physical products themselves.

Commodity houses

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Participate in the secondary trading of corporate debt by “making markets” in specific issues. The dealers buy and sell these instruments against their own client and other broker/dealers.

Corporate bond dealers

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Use the services of another firm to clear and settle trades that they have entered into on behalf of their clients or themselves.

Correspondent firms

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Clearing firm carries and is responsible for the clients’ accounts of the correspondent firm.

Operating on a fully disclosed basis.

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A correspondent firm that maintains the identity of its clients and is responsible for the account.

Operating on a nondisclosed basis.

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Correspondent firm operating on a nondisclosed basis.

Introducing firm or nonclearing firm.

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Specialize in servicing nonclearing broker/dealers by comparing and settling the correspondent’s contra broker (opposing broker) trades.

Correspondent clearing firms

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Operate in certain markets where a central place for trading does not exist. These firms act as conduits between broker/dealers, assisting them in locating or selling particular types of securities.

Dealer’s brokers

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Do not offer all the services and amenities that a full-service firm offers. Therefore, they can offer a lower commission charge than a full-service firm.

Discount brokers

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Broker/dealers who take positions (make markets) in shares of corporate stock and trade against their own clients and other broker/dealers. They are found primarily in the over-the-counter market.

Equity dealers

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Offer clients many different products, such as common and preferred stocks; corporate, municipal, and U.S. Treasury debt instruments; derivatives (that is, options, futures and swaps); and different types of account custodial services.

Full-service broker/dealers

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Trade on the floor of a futures exchange. There they trade contracts for a delivery sometime in the future in such products as grains, metals, currencies, indexes, bonds, and, recently, common stocks.

Futures trading firms

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Must be approved by the Federal Reserve Board (the Fed). Once approved, they buy U.S. Treasury instruments directly from the Fed and sell them to the public. In addition, they maintain positions in government securities, which they buy and sell in trading against the public.

Government dealers

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Specialize in offering financial services to institutions, such as corporations, mutual funds, and trust companies.

Institutional broker/dealers

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Have a main office in one country but maintain other offices, both in the home country and in other countries.

International broker/dealers

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Assist corporations, municipalities, and certain other entities in their efforts to raise and manage capital. This includes but is not limited to bringing an entity’s securities to the public markets.

Investment banking firms

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Risk their capital in trading chosen securities against their own clients and other broker/dealers.

Market-making firms. These firms are also known as dealers or trading firms.

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Invest, either alone or with a group, in corporations or other perceived opportunities. They become part of the ownership of the entity they are investing in. It is usually not their intention to take control and manage the company. They are primarily interested in the investment aspects of the company.

Merchant banking firms

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Work with their corporate clients in recommending, structuring, and acting as an intermediary in mergers and acquisitions. They are also involved in one or the other side of a hostile takeover bid.

Merger and acquisition specialists

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Act as a conduit for issuers that pool loans and issue securities against the pool. The buyers of these issues receive interest and principal payments periodically.

Mortgage-backed dealers

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Have several “headquarters” globally; they conduct business in various countries as if they were domiciled there.

Multinational broker/dealers

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Specialize in making markets in the secondary trading of municipal debt instruments. Their focus is on distribution of state and local government debt products.

Municipal bond dealers

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Do not belong to a clearing corporation and therefore use the services of a clearing firm to settle their trades with opposing broker/dealers.

Nonclearing broker/dealers

Their clients enter orders via the Web through the firm’s computer system straight to the marketplace where the particular issue is traded. Once the transaction is executed, a report is sent to the client electronically.

Online broker/dealers

Usually trade on the options exchanges, such as American Stock Exchange (AMEX), Chicago Board Option Exchange (CBOE), and International Securities Exchange (ISE). The market makers trade for their own accounts against other traders and the public. These firms usually do not conduct business directly with public clients.

Option market-making firms

Write or purchase customized options on a one-to-one basis against their own clients for other broker/dealers’ clients. These customized options are basically illiquid and do not use the facility of a clearing corporation to settle their trades.

Option market-making firms

Act as a central custodial facility for institutions that utilize the services of many broker/dealers.

Prime brokers

Have their headquarters outside of New York and its vicinity. Such a firm probably has sales branch offices near its headquarters office.

Regional broker/dealers

Provide financial services to the public at large. They may have one or several branch offices where sales are conducted.

Retail firms

Members of an equity exchange that is charged with making a fair and orderly market in the securities assigned to them and with executing public orders entrusted to them by other broker/dealers.

Specialist firms

Dealers that take positions and trade New York Stock Exchange-listed securities that qualify for “off-board” trading.

Third-market broker/dealers

General term used to describe a retail firm that has many sales branches that communicate with the main office through telephone wires.

Wire house

Must hold a license with the Securities and Exchange Commission (SEC).

Broker/Dealers

Firm that purchases and sells securities for its clients in the marketplace, but never trades against the client’s order.

Broker

Firm that positions a security and trades against the public.

Dealer

Three primary components of a typical broker/dealer

Front Office, Middle Office, and Back Office

Comprised primarily of revenue-producing areas. Here are the retail and institutional sales forces.

Front Office

Can best be described as “order control.” Broker/dealers that are heavily automated employ this function to verify different aspects of a client’s order to purchase and sell securities.

Middle Office

Required by rule 10b-10 of the Securities and Exchange Act. The broker/dealer maintains a list of codes that are used to identify in what marketplace the trade occurred and what capacity the form acted. In addition, a unique number is appended to the particular trade for reference purposes.

Coding

Determines the amount of money to be received or paid on a trade. This includes the firm’s revenue, accrued interest in the case of certain debt instruments, and fees plus first and net money.

Figuration

What the buying broker/dealer will pay the selling broker/dealer.

First money

The sum that the client must address.

Net money

Ensures that every order received from clients that could be executed was executed.

Trade verification

Responsible for taking the executed order from the point of execution to final settlement. This includes both client and “street” sides of the transaction.

Back Office

Street side trade verification of a transaction between contra broker/dealers. Tells the firm (contra broker) that the security was bought (or sold).

Comparison

Customer-side trade notification and verification. Official notification to the client as to the terms of the transaction.

Confirmation

Monitoring of client accounts to ensure they are operating within the confines of Regulation T of the 1934 Securities and Exchange Act, self-regulatory organizations’ (SROs’) rules, and regulations, as well as broker/dealer’s own “house” rules.

Margin

Permits the lending of money to acquire securities, or the lending of securities in the case of a short sale.

Margin account

Optimizing the firm’s security and monetary resources in the settlement of transactions.

Settlement

1934 Securities and Exchange Act, adhering to procedures set forth in Regulation T and Rule 15C-3 of the 1934 federal act as to possession or control of Clients’ Securities.

Security control

Seeking out the minimum expense to the firm for financing day-to-day transaction-related operations.

Financing

Making sure the clients are operating their accounts in accordance with agreed-to processes.

Client account servicing

Following up with clients who are delinquent in performing required actions, such as paying for purchases, delivering negotiable securities against their sales, or meeting maintenance calls for additional collateral.

Client account servicing

Performing custodial services for clients who maintain security positions at the broker/dealer, which includes proxy (absentee voting privileges), payment of dividends and/or interest to the clients on a timely basis, making sure the clients are notified and their positions operated in accordance with the clients’ instructions in the case of certain corporate actions such as tender offers, and accurately maintaining the actual security positions.

Client account servicing

Presented in alphabetical order by security and then by account order within each security, reflects all security movements that occurred on a specific day.

Activity Stock Record

Presented in alphabetic security order and then account within security, reflects all of the security positions that are the firms responsibility.

Summary Stock Record

Presented in strict account number order, reflects all of the money entries that the firm has processed on a given day.

Daily Cash listing

Presented in strict account number order, contains all of the money balances that are the firm’s responsibility.

General Ledger

Money balances in the general ledger when totalled

Trial balance

Books and records that are backbone of the broker/dealer.

Stock Record and General Ledger

Broker who has no financial interest in the trade executes the public order against another broker and charges a commission for the service.

Executed on an agency basis

Public orders executed against market makers who have a financial commitment to the particular product. The dealer chargers a markup for this service.

Executed on a principal basis

Markets with a bid and offer quote.

Two-Sided Market

Amount of security comprising the bid and offer.

Size. Given in 100-share lots.

Primary regulator of the security industry.

Securities and Exchange Commission

The process of getting a security approved for sale to the public within a state.

Blue skying

Regulatory authority of future products

Commodity Futures Trading Commission (CFTC)

Regulatory report concerned with the financial strength of the firm. Liquid assets are applied to the firm’s liabilities that represent potential financial exposure.

Net Capital (153c-1 of the 1934 Securities and Exchange Act)

Regulatory report analyzing the firm’s exposure to clients.

Customer Protection (15c3-3 of the 1934 Securities and Exchange Act)

Regulatory report that is a combination of the Net Capital and Customer Protection reports as well as items from the broker/dealers balance sheet, profit and loss statement, and operational controls.

FOCUS (Financial and Operations Combined Uniform Single)

When a new issue is brought to market

Initial public offering (IPO)

Client that buys a security and holds it long-term for interest income or capital appreciation.

Investor

Client that focuses on volatility of a security and actively trade. Do not hold securities in position for long periods of time.

Traders

Clients who anticipate events happening and take market action based on their assessment. They hold the security position until the event occurs.

Speculators

Two categories of clients

Retail and Institutional

Account owned and operated by one person.

Individual account

Account owned and operated by two or at a maximum three people.

Joint account

Account operated by persons other than the account owner(s).

Power of attorney account

Account operated for the benefit of a minor or incompetent.

Custodian account

Accounts which involve a formal agreement among individuals to operate as a unit.

Partnership accounts

Account owned and operated under the charter and bylaws of a cooperation.

Corporate account

Account operated by individual(s) other than the beneficiaries of the trust.

Trust account

Entities that retain assets for their owners.

Depositories. Depository Trust Company Division of the Depository Trust and Clearing Corporation and the Fedwire, a part of the Federal Reserve.

Where transactions are compared and/or gathered for netting, negating the need to settle transactions on an individual basis.

Clearing corporations. National Securities Clearing Corporation (NSCC), Fixed Income Clearing Corporation (FICC), divisions of the DTCC, and Options Clearing Corporation (OCC).

The process by which the individual firm’s transactions in a specific issue are reduced to a single net position balance (either receive, deliver, or flat) and that balance is applied industrywide against other participants.

Netting

Used to finance margin and proprietary account loans.

Collateral loans

For satisfying daily margin requirements at clearing corporations and other purposes.

Letters of credit

Supported only by the good name of the broker/dealer and used for everyday operation of the broker/dealer.

Unsecured loans

Keeping the registered ownership of securities and acting as the servicing agents for the registering of securities into another name.

Transfer agent

Paying dividends, interest, and other corporate distributions authorized by the issuing entity to registered holders appearing on the transfer agent’s books.

Dividend dispersing agent (DDA)

Function is to verify the accuracy of the transfer agents’ records.

Registrar

Introducing into the marketplace investment vehicles, such as certificate of deposits (CDs) and asset-backed securities, for the public to invest in.

Product issuer

Providing custodial services, such as asset servicing for institutions, high-net-worth individuals, and broker/dealers.

Custodian

Along with some broker/dealers, bring certain types of issues, such as municipal securities, into the public markets.

Underwriter

Regulator of the municipal bond market, promulgates rules known as the G rules. Also sets the rules governing the mortgage-backed security segment of the financial market as well as setting the delivery dates for the various products trading under that umbrella.

The Bond Market Association (TBMA)

Represents industry interests with regulators and lawmakers. Also has several divisions representing different segments of the market.

Security Industry Association (SIA)

I: Overview of the Industry Flashcards

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