Series 65 wk 5 Flashcards
(181 cards)
1
Q
What does the Securities Act of 1933 regulate? What does it require of issuers?
A
The primary market. It requires issuers to file a registration statement with the SEC (Securities Exchange Commission
2
Q
What does the primary market consist of? Who receives the proceeds from sale of securities?
A
Primarily of transactions between issuers of securities and investors. In a primary market transaction, the issuer of the securities receives the proceeds from the sale of the securities
3
Q
How long does SEC take to review registration statement? How can this get extended?
A
For a minimum of 20 days (known as cooling-off period). If SEC issues a deficiency letter or a stop order, the cooling-off period will get extended beyond original 20 days and continues until all information is has requested is received
4
Q
What can’t happen during cooling off-period?
A
No sales of securities may take place
5
Q
What is the registration statement? What is it also known as?
A
Also known as S1 – is the issuer’s full disclosure document for the registration of the securities with the SEC
6
Q
What is a preliminary prospectus and how is it used? What is it also known as?
A
The only thing a registered representative may do during cooling-off period is obtain indications of interest from clients by providing them with a preliminary prospectus (also known as a red herring) – this contains most of the same information that will be in the final prospectus, except for the offering price and the proceeds to the issuer.
7
Q
What is an indication of interest?
A
An investor’s or broker dealer’s statement that they may be interested in purchasing the securities being offered.
8
Q
What is a final prospectus, what must it include (13), when is it given?
A
All purchasers of new issues must be given a final prospectus before any sales may be allowed, the final prospectus serves as the issuer’s full-disclosure document for the purchaser of the securities. It must include:
- Type and description of the securities
- Price of security
- Use of the proceeds
- Underwriter’s discount
- Date of offering
- Type and description of underwriting
- Business history of issuer
- Biographical data for company officers and directors
- Information regarding large stockholders
- Company financial data
- Risks to purchaser
- Legal matters concerning the company
- SEC disclaimer
9
Q
What is the SEC disclaimer?
A
The SEC does not guarantee accuracy or adequacy of information in SEC, so all prospectuses must state: “These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information.
10
Q
Financial relief for misrepresentations made under the Securities Act of 1933 is available for purchasers of a security that is sold under a prospectus that is found to have false or misleading statements. Who can they seek financial relief from (5)?
A
- Issuer
- Underwriters
- Officers and directors
- All parties who signed the registration statement
- Accountants and attorneys who helped prepare the registration statement
11
Q
What does the Securities Exchange Act of 1934 regulate?
A
Second major piece of legislation that resulted from market crash of 1929. This regulates the secondary market.
12
Q
What is included in the secondary market?
A
Investor-to-investor transactions (all transactions between two investors that are executed on any of the exchanges or in the over-the-counter market)
13
Q
Who receives money in the secondary market transaction?
A
The selling security holder receives the money, not the issuing corporation
14
Q
What is the Securities Exchange Act of 1934 responsible for? (10)
A
- Created the SEC
- Requires registration of broker dealers and agents
- Regulates the exchanges and FINRA
- Requires net capital for broker dealers
- Regulates short sales
- Regulates insider transactions
- Requires public companies to solicit proxies
- Requires segregation of customer and firm assets
- Authorized the Federal Reserve Board to regulate the extension of credit for securities purchases under Regulation T
- Regulates the handling of client accounts
15
Q
Who works for the Securities Exchange Commission (SEC)?
A
Five commissioners are appointed to 5-year terms by the president and each must be approved by the Senate. No more than 3 commissioners may be from any one political party.
16
Q
Is the SEC a SRO or DEA?
A
SRO – self-regulating organization
DEA – designated examining authority
SEC is not a SRO or DEA (like NYSE or FINRA – these can regulate its own members)
17
Q
Who must register with the SEC (4)?
A
Broker dealers, exchanges, agents and securities
18
Q
When exchanges file a registration statement with the SEC, what is required to include (3)?
A
Articles of incorporation, bylaws, and constitution
19
Q
When do issuers of securities need to register with the SEC and what do they need to do after registering (2)?
A
Issuers of securities with more than 500 shareholders and with assets exceeding $5M must register with the SEC. They need to file quarterly and annual reports and must solicit proxies from stockholders
20
Q
What are requirements of broker dealers who register with the SEC (2)?
A
All broker dealers are required to forward a financial statement to all customers of the firm.
All employees of broker dealer who are involved in securities sales, have access to cash and securities or who supervise employees must be fingerprinted.
21
Q
What are the regulations that give the Federal Reserve Board the authority to govern activities of different lenders through extension of credit?
A
- Regulation T: broker dealers
- Regulation U: banks
- Regulation G: all other financial institutions
22
Q
What is the Public Utilities Holding Company Act of 1935? What are their securities exempt from?
A
Regulates all companies that are in business to provide retail distribution of gas and electric power. These are exempt from state registration requirements
23
Q
What are the Financial Industry Regulatory Authority (FINRA)’s 4 bylaws?
A
- Rules of fair practice
- Uniform practice code
- Code of procedure
- Code of arbitration
24
Q
What is the Trust Indenture Act of 1939?
A
Requires the corporate bond issues in excess of $5M that are to be repaid during a term in excess of 1 year issue a trust indenture for the issue (only applies to corporate issuers, federal and municipal issuers are exempt).
25
What is Investment Advisers Act of 1940, who do they regulate? What do they set out requirements about (6)?
Regulates industry professionals who charge a fee for the advice they offer to clients.
Set forth registration requirements for advisers as well as disclosure requirements relating to the adviser’s:
1. Methods of recommendations
2. Type of securities recommended
3. Professional background and qualifications
4. Fees to be charged
5. Method for computing and charging fees
6. Types of clients
26
What is the Investment Company Act of 1940? Who does it regulate? Who does it set forth registration requirements for (3)?
Regulates companies that are in business to invest or reinvest money for the benefit of its investors
Sets forth requirements for the 3 types of investment companies including:
1. Management investment company
2. Unit investment trust (UIT)
3. Face amount company (FAC)
27
What are the 3 categories of member communication with the public regulated by FINRA Rule 2210?
1. Retail communication
2. Institutional communication
3. Correspondence
28
What is retail communication defined as? Who does this need to be approved by?
Any written communication distributed or made available to 25 or more retail investors in a 30-day period (hard copy or electronic). A retail investor is any investor who does not meet the definition of an institutional investor.
All retail communications must be approved by a registered principal prior to first use (if communications does not promote the business of the member firm or provide investment advice, does not need to be approved by principal).
29
How long must retail communication be maintained by the member?
3 years
30
What is required for retail communication if the member firm has been in existence for less than 12 months? More than 12 months?
Less than 12 months – must file all retail communications with FINRA 10 days prior to its first use unless communications has been previously filed and contains no material changes or has been filed by another members such as an investment company or ETF sponsor.
More than 12 months – May file retail communications with FINRA 10 days after the communication is first used.
31
What 3 things must be filed 10 days with FINRA before prior first use?
Investment companies, ETF sponsors, and retail communications
32
What is institutional communications?
Defined as any written communication distributed or made available exclusively to institutional investors (hard or electronic copy)
33
Institutional communications do not have to be approved by a principal prior to first use as long as what?
As long as the member has established policies and procedures regarding the use of institutional communications and has trained its employees on the proper use of institutional communication
34
How long do institutional communication need to be maintained by a member?
3 years
35
What is an institutional investor?
A person or firm that trades securities for his or her own account or for the account of others. There is no minimum size for an institutional account.
36
Institutional investors include (10)?
1. Broker dealers
2. Investment advisers
3. Investment companies
4. Insurance companies
5. Banks
6. Trusts
7. Savings and loans
8. Government agencies
9. Employment benefit plans with more than 100 participants
10. Any non-natural person with more than $50M in assets
37
What is correspondence?
Consists of electronic and written communications between the member and up to 25 retail investors in a 30 calendar-day period. Doesn’t need to review all correspondence, just needs to review a sample. Member should, where practical, review all incoming hardy copy correspondence (could contain cash, checks, securities or complaints).
38
What are 3 rules for corporate websites?
1. Website clearly states that firm may only conduct business in states where it is properly registered to do so
2. Website only provides general information about the firm and does not provide specific investment advice
3. The firm or its agent may not respond to internet inquiries with the intent to solicit business without first meeting the registration requirements in the state of the prospective customer
39
When content of any website will be first used or updated, what needs to happen?
Prior to first use – must be filed with FINRA within 10 days of use
Material changes – updates must be reapproved by principal and refiled with FINRA
40
What are the only form of advertising that does not require member’s name to appear in the ad?
Blind recruiting ads
41
What are generic advertising ads, what do they include (3)?
Generally designed to promote firm awareness and to advertise products and services generally offered through the firm. Generally includes:
1. Securities products offered (stocks, bonds, mutual funds)
2. Contact name, number and address
3. Type of accounts offered (individual, IRA, 401K)
42
What is a tombstone ad? What can these include (5)? What must they include (4)?
Tombstone ad is an announcement of a new security offering coming to market.
May include:
1. Description of securities
2. Description of business
3. Description of transaction
4. Required disclaimers
5. Time and place of any stockholders meetings regarding the sale of the securities
Must include:
1. A statement that the securities registration has not yet become effective
2. A statement that responding to the ad does not obligate the prospect
3. A statement as to where a prospectus may be obtained
4. A statement that the ad does not constitute an offer to sell the securities and that an offer may only be made by the prospectus
43
Who must tombstone ads be approved by?
All advertising and sales literature is required to be approved by a principal of the firm prior to its first use.
A general security principal (Series 24) may approve most advertising and sales literature.
Any advertising or sales literature relating to options must be approved by a registered option principal or the compliance registered options principal.
Research reports must be approved by a supervisory analyst.
44
What must testimonials include (4)?
1. Disclaimer that past performance is not indicative of future performance
2. If individual giving testimony was compensated in any way
3. If person making testimony is an expert, a statement regarding their qualifications as an expert must also be contained in the ad or sales literature
4. Research prepared by outside parties must disclose the name of the preparer
45
What can’t testimonials be used in?
Investment advisers’ communications or advertising
46
What 5 things are considered to be misleading statements and cannot appear in communications with investors?
1. Excessive hedge clauses
2. Implying an endorsement by FINRA, NYSE, or SEC
3. Printing the FINRA logo in type that is larger than the type of the member’s name
4. Implying the member has larger research facilities than they actually have
5. Implying an individual has higher qualifications than they actually have
47
What is the Securities Investor Protection Corporation Act of 1970 (SIPC)?
A government-sponsored corporation that provides protection to customers in the event of a broker dealer’s failure.
48
Who is required to be registered as an SIPC member?
All broker dealers registered with the SEC. They are also required to pay annual dues to SIPC insurance fund to cover losses due to broker dealer failure. If a broker dealer fails to pay the SIPC assessment, they may not transact business until it is paid.
49
What are broker dealers required to maintain a certain level of to ensure they are financially solvent? What is the amount depend on?
Net Capital requirement. Depends on type of business the broker dealer conducts (larger and more complex businesses need greater net capital requirements).
50
What happens if a broker dealer’s net capital requirement is not met?
Broker dealer is deemed insolvent and SIPC will petition in court to have trustee appointed to liquidate the firm and protect the customers.
51
What is the customer coverage that the SIPC provides?
Covers customer losses that result from broker dealer failure, not for market losses. SIPC covers customers for up to $500K per separate customer (of the $500K, up to $250K may be in cash, customer would not be covered for any amount exceeding $250K in cash and would become a general creditor for the rest)
52
What is a fidelity bond?
All SIPC members are required to obtain a fidelity bond to protect customers in the event of employee dishonesty. Fidelity bonds can insure against things like forgery and fraudulent trading
53
What is minimum amount of the fidelity bond?
$25K (large firms are often required to carry a higher amount)
54
What is the MSRB? What law gave it authority?
MSRB regulates issuance and trading of municipal bonds. The Securities Acts Amendments of 1975
55
What is the Insider Trading and Securities Fraud Enforcement Act of 1988?
Established guidelines and controls for the use and dissemination of nonpublic material information.
(Nonpublic information is information that is not known by people outside of the company; material information is information regarding a situation or development that will materially affect the company in the present or future).
56
What are the penalties for violators of the Insider Trading Act (4)?
1. A fine of 300% of the amount of the gain or 300% of the amount of the loss avoided for the person who acts on the information
2. A civil or criminal fine for the person who divulges the information
3. Insider traders may be sued by the affected parties
4. Criminal prosecutions: fine of up to $1M and 20 years in prison
57
Who can be considered an insider (5)?
1. Officer, director, 10% stockholder
2. Anyone who is in possession of nonpublic material information as well as spouse of any person
3. Accountants
4. Attorneys
5. Investment bankers
58
Where is a firewall used in a broker dealer firm?
Broker dealers who act as underwriters and investment bankers for corporate clients must ensure that no inside information is passed between its investment banking department and its retail trading department (these need to be physically separated by a firewall).
59
What is the telephone consumer protection act of 1991? What are the rules (7)?
Regulates how telemarketing calls are made by businesses.
Rules:
1. Call only between 8am-9pm
2. Maintain a do-not call list (cannot be contacted for 5 years)
3. Give the firm’s name, address, and phone number when soliciting
4. Follow adequate policies to maintain a do not call list
5. Train representatives on calling policies and use of do-not-call list
6. Ensure that any fax solicitations have the firm’s name, address, and phone number
7. Ensure the name of the firm and its phone number are displayed on caller ID
60
Who are exempt from Telephone Consumer Protection Act (3)?
1. Calls to existing customers
2. Call to a delinquent debtor
3. Calls from a religious or nonprofit organization
61
What is the National Securities Market Improvement Act of 1996? What is it also known as?
Also known as the Coordination Act, eliminated the duplication of effort among state and federal regulators.
62
What are some key points of the National Securities Market Improvement Act (4)? What did this law ensure that a state could not impose laws or requirements upon a broker dealer relating to (5)?
```
Key points:
1. Federal law overrides state law
2. Registration requirements for investment advisers
3. Capital requirements
4. Increased industry competition by eliminating collusive behavior
What can’t laws impose on:
1. Capital requirements
2. Recordkeeping
3. Financial reporting
4. Margin
5. Custody
```
63
What is the Uniform Securities Act?
Laid out model legislation for all states in an effort to make each states rules and regulations more uniform and easier to address. This Act sets minimum qualification standards for each state securities administrator.
64
Who is the state securities administrator?
The top securities regulator within the state; may be the attorney general of that state or an individual appointed specifically to that post.
65
What does the Uniform Securities Act prohibit (5)?
1. Prohibits the state securities administrator from using the post for personal benefit or from disclosing information
2. Gives the state securities administrator authority to enforce the rules of the USA within the state
3. Gives the administrator the ability to set certain registration requirements for broker dealers, agents, and investment advisers
4. Administrators may set fee and testing requirements
5. Administrators may suspend or revoke the state registration of a broker dealer, agent, investment adviser, a security, or a security’s exemption from registration
66
What are the actions a member firm must take to guard against money laundering?
1. Every member must report any currency receipt of $10K or more from any one customer on a single day
2. Firm must fill out and submit a currency transaction report also known as Form 4789 to the IRS within 15 days of the receipt of the currency
3. Multiple deposits that total $10K or more will also require firm to file a currency transaction report (CTR).
4. Firm is required to maintain a record of all international wire transfers of $3K or greater
67
What must every member report from any one customer on a single day?
Any currency receipt of $10K or more
68
What is the Patriot ACT?
Requires broker dealers to have written policies and procedures designed to detect suspicious activity. Firm must file a Suspicious Activity Report for any transaction of more than $5K that seems questionable and must be filed within 30 days of identifying any suspicious activity. Looking for money laundering activity and correspondence with terrorists
69
What are the steps of the money laundering process (4)?
1. Begins with placement of funds (when money is deposited in an account with the broker dealer)
2. Laundering process known as layering (will consist of multiple deposits in amounts less than $10K – funds will often be drawn from different financial institutions, this is also known as structuring)
3. Launderers will then purchase and sell securities in the account
4. Integration of the proceeds back into the banking system completes the process
70
What is the penalty for money laundering?
Subject to prosecution and face up to 20 years in prison and a $500K fine per transaction
71
What is FinCEN, what do they do?
FinCEN is a bureau of the US Department of Treasury. FinCEN’s mission is to safeguard the financial system and guard against money laundering and promote national security.
FinCEN collects, receives, and maintains financial transactions data, analyzes and disseminates that data for law enforcement purposes and builds global cooperation with counterpart organization win other countries with international bodies.
72
What is regulation S-P?
Requires that the firm maintain adequate procedures to protect the financial information of its customers. Firms must develop and maintain specific safeguards fort heir computer systems and Wi-Fi access
73
What must a firm deliver to adhere to Regulation S-P (2)?
Must deliver:
1. An initial privacy notice to customers when the account is opened
2. An annual privacy notice to all customers
74
What is Regulation S-AM?
Prohibits broker dealers from soliciting business based upon information received from affiliated third parties unless the potential marketing had been clearly disclosed to the potential customer, and the potential customer was provided an opportunity to opt out and did not opt out.
75
What the Federal Trade Commission require of banks and broker dealers in relation to identity theft?
Requires them to establish and maintain written identity theft prevention programs (broker dealer’s written supervisory procedures manual must reference its identity theft program which must be designed to detect red flags relating to known suspicious activity employed during an attempt at identity theft).
76
What act gave the NASD the authority to regulate the over-the-counter market?
Maloney Act of 1938
77
What are investor-to-investor transactions known as?
Secondary market transactions
78
Where do secondary market transactions take place?
On an exchange or in the over-the-counter market known as Nasdaq
79
All day orders are considered day orders unless otherwise specified? T/F
True
80
What happens to day order at end of day if it is not executed?
It is canceled
81
What is a GTC (Good ‘Til Cancel) order?
When an investor specifies that their order remain active until canceled.
82
When does a market order guarantee that the investor’s order is executed? What does this not guarantee?
As soon as the order is presented to the market. It does not guarantee the price which the order will be executed
83
What is a buy limit order?
A buy limit order sets the maximum price that the investor will pay for the security (order may never be executed at a price higher than the investor’s limit price.
84
What is a sell limit order?
Sets the minimum price that the investor will accept for the security. Order may never be executed at a price lower than the investor’s limit price.
85
What is a stop order/stop loss order?
This is used by investors to limit or guard against a loss or to protect a profit. A stop order will be placed away from the market in case the stock starts to move against the investor (a stop order is not a live order; it has to be elected).
A stop order is elected and becomes a live order when the stock trades at or through the stop price (also known as trigger price).
Once the stock has traded at or through the stop price, the order becomes a market order to either buy or sell the stock depending on the type of order that was placed.
86
What is a buy stop order?
This is placed above the market and is used to protect against loss or to protect a profit on a short sale of stock.
A buy order also could be used by a technical analyst to get long the stock after the stock breaks through resistance
Ex: An investor has sold 100 shares of ABC short at $40/share, ABC has declined to $30/share. The investor is concerned that if ABC goes past $32 it may return to $40. To protect their profit, they enter an order to buy 100 ABC at 32 stop. If ABC trades at or through $32, the order will become a market order to buy 100 shares and investor will cover short at next available price.
87
What is a sell stop order?
A sell stop order is placed below the market and is used to protect a loss or to protect a profit on a purchase of a stock.
A sell stop order also could be used by a technical analyst to get short the stock after the stock breaks through support.
88
What is a stop limit order?
An investor would enter a stop limit order for the same reasons they would enter a stop order. The only difference is that once the order has been elected, the order becomes a limit order instead of a market order.
89
What are the other types of orders (5)?
1. All or none (AON)
2. Immediate or cancel (IOC)
3. Fill or kill (FOK)
4. Not held (NH)
5. Market on open/market on close
90
What is an “All or none” order”?
These orders may be entered as day orders or GTC. As the name implies, all or none orders indicate that the investor wants to buy or sell all of the securities or none of them. All or none orders are not displayed in the market because the required special handling and the investor will not accept a partial execution.
91
What are “immediate or cancel” orders?
The investor wants to buy or sell whatever they can immediately and whatever is not filled is cancelled.
92
What are fill or kill orders?
The investor wants the entire order executed immediately or the entire order is cancelled.
93
What are “not held” orders?
The investor gives discretion to the floor broker as to the time and price of execution. These are considered day orders unless order is received in writing from the customer and entered GTC.
94
What are “Market on open/market on close orders”?
The investor wants their order executed on the opening or closing of the market or as reasonably close the opening or closing of the market as practical. If the order is not executed, it is canceled. Partial executions are allowed.
95
What is the most recognized stock exchange in the world?
NYSE – New York Stock Exchange
96
What do all transactions in an exchange-listed security that are executed on the exchange have to take place in front of?
The specialist or designated marker maker (DMM) for that security
97
Who is the specialist/DMM?
An exchange member who is responsible for maintaining a fair and orderly market for the stock in which they specialize.
98
What are all securities that trade on an exchange known as?
Listed securities
99
What are orders that are routed to the trading post for execution prioritized by (2)?
Price and time
100
If the price of more than one order is the same, how are the orders filled (3)?
1. Priority: The order that was received first gets filled first
2. Precedence: If the time and price are the same, the larger order gets filled
3. Parity: If all conditions are the same, the orders are matched in the crowd and the shares are split among the orders
101
What is the specialist/DMM responsible for (4)?
1. Maintaining a fair and orderly market for the securities
2. Buying for their own account in the absence of public buy orders
3. Selling from their own account in the absence of public sell orders
4. Acting as an agent by executing public orders left with them
102
In the absence of public orders, the specialist/DMM is required to do what when acting as a principal?
To provide liquidity and price improvement for the stocks in which they are designated market maker. They are required to trade against the market and may now trade for their own account at prices that would compete with public orders.
Ex: If a bid for 1000 shares came in for 20.45 and 1000 shares are offered at 20.55, DMM could purchase stock for their own account at 20.45 because they are on parity with public OR purchase the stock for their own account at 20.50 and would be improving the price that the seller would be receiving (known as price improvement) OR could sell stock from own account at 20.55, because they are now allowed to compete with the public OR sell stock to customer at 20.40 because, once again that woulc be providing price improvement for the order
103
When orders have been left with the specialist/DMM for execution “dropped on specialist’s/DMM’s book”, what is specialist/DMM required to do when acting as an agent?
Required to execute orders that have been left with them. Required to maintain a book of public orders and to execute them when market conditions permit.
The specialist/DMM will execute the orders if and when they are able to and send an omission bill to the member who left the order with them for execution
104
What are the types of orders that may be left with the specialist (5)?
1. Buy and sell limit orders
2. Stop orders
3. Stop limit orders
4. Both day and GTC orders
5. AON orders
105
What is the best or inside market comprised of?
The highest bid and lowest offer (made up from bids and offers contained in the specialist’s/DMM’s book and in the trading crowd. The inside market is also the market that is displayed to broker dealers and agents on their quote system.
106
What does the specialist/DMM do when quoting the inside market? What orders are not included when determining the inside market?
Add all of the shares bid for at the highest price and all of the shares offered at the lowest price to determine the size of the market
Not included: Stop orders and AON orders
107
What 5 types of orders can a specialist/DMM not accept?
1. Market orders
2. Immediately executable limit orders
3. Not held orders
4. Immediate or cancel orders
5. Fill or kill orders
Market orders and immediately executable limit orders are filled as they reach the crowd so there is nothing to leave with the specialist.
108
What does it mean to pair off or cross stock orders?
A floor broker from time to time may get an order from both a buyer and a seller in the same security and may be allowed to execute both orders simultaneously (“cross the orders”).
In order to do this, specialist/DMM must allow it and floor broker must announce the orders in an effort to obtain price improvement for the orders. The floor broker must offer the stock for sale at a price above the current best bid and may purchase the stock using the buy order of no price improvement has been offered. This will then complete the cross and both orders will be filled.
109
GTC orders that are placed underneath the market and left with the specialist/DMM for execution will be reduced for what? What are the type of orders that will be reduced (2)? How are market orders adjusted in this case?
Will be reduced for the distribution of dividends
Orders that will be reduced: 1. Buy limits 2. Sell stops
To ensure that customer orders placed below the market are only executed as a result of market activity, the order will be adjusted down by the value of the dividend.
110
What does Buy 500 XYZ 35 GTC DNR mean?
The stock XYZ will be bought at 35 ‘Good Til Cancel’ ‘Do not reduce’ because of a dividend payment
111
What 2 orders placed above the market are not reduced for distributions?
Sell limits and buy stops
112
What do GTC orders left with the specialist need to be adjusted for?
Stock splits. Orders that are placed above and below the market will be adjusted so that the aggregate dollar value of the order remains the same.
113
How do you calculate the adjustment to an open order for a forward stock split?
Multiply the number of shares by the fraction and the share price by the reciprocal of the fraction
Ex: Buy 100 at 50 after a 2:1 stock split; 100 x 2/1 = 200; 50x1/2 = 25 (Value of order was $5K before and after order)
114
What is “stopping stock”?
As a courtesy to a public customer, a specialist/DMM may guarantee an execution price while trying to find an improved or better price for the public customer.
115
What is a commission house broker?
An employee of a member organization and will execute orders for the member’s customers and for the member’s own account
116
What is a two-dollar broker?
An independent member who will execute orders for commission house brokers when they are too busy managing other orders.
117
What is a registered trader?
An exchange member who trades for their own account and for their own profit and loss. Orders may not originate on the floor of the NYSE, however, registered traders are active on other exchanges such as Amex.
118
What is a supplemental liquidity provider/SLP?
An off-the-floor market maker that directs orders to the floor of the NYSE for its own account. The SLP may compete with the DMM for order execution and must display a bid or offer at least 5% of the time.
The SLP will receive a rebate from the NYSE when an order is executed against the SLP’s quote that added liquidity to the market.
119
What is the super display book (SDBK)?
Customer orders are electronically routed directly to the trading post for execution via the super display book system. The super display book bypasses the floor broker and sends the order right to the specialist/DMM for execution. If order can be immediately executed, the system will send an electronic confirmation of the execution to the submitting broker dealer.
120
Which orders are done through the super display book system?
All listed securities are eligible to be traded over this. All preopening orders that can be matched up are automatically paired off by the system and executed at the opening price. Any preopening orders that cannot be paired off are routed to the trading post for inclusion on the display book.
121
What is a short sale?
An investor who believes that the stock price has appreciated too far and is likely to decline may profit from this belief by selling the stock short.
In a short sale, the customer borrows the security in order to complete delivery to the buying party. The investor sells the stock high hoping that they can buy it back cheaper and replace it.
The investor’s first transaction is a sell and they exit the position by repurchasing the stock
The short sale of stock has unlimited risk because there is no limit to how high the stock price may go.
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When does an investor lose money in a short sale?
If the stock appreciates past their sales price.
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What is Regulation SHO? What does it cover (3)?
Regulation of Short Sales – has been adopted to update prior short sale regulations and covers:
1. Definitions and order marketing
2. Suspension of uptick and plus bid requirements
3. Borrowing and delivery requirements for securities.
Under Regulation SHO, the SEC has prohibited any SRO from adopting any price criteria as a requirement of executing a short sale.
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What is Rule 200?
Updates the definition of who is determined to be long a security.
The new updates under Rule 200 are:
1. A person is considered long the security if they hold a security future contract and have been notified that they will receive the underlying security
2. A broker dealer must aggregate its net positions in securities unless it qualifies to allow each independent trading unit to aggregate its positions independently
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When can a broker dealer qualify to have its various trading departments determine their net long or short positions independently (5)?
1. Traders are only assigned to one independent trading unit at any one time
2. Traders in each independent trading unit employ their own trading strategies and do not coordinate their trading with other independent trading units.
3. The firm has documented each aggregation unit and the independent trading objectives of each unit.
4. The firm supports the independent nature of each trading unit.
5. At the time a sell order is entered, each independent aggregation unit determines its net position for the security.
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What do the order marking requirements of Rule 200 require the broker dealer to do?
To mark all orders long, short, or short exempt
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Where are the long and short definitions found? What was this expanded to include (3)?
In the affirmative determination rule
Have been expanded to include:
1. An order may be marked long if the investor or broker dealer have possession of the security and can reasonably be expected to deliver the security by settlement date.
2. An order must be marked short if the investor or broker dealer have possession of the security but cannot reasonably be expected to deliver the security by settlement date
3. An order does not need to be marked short exempt if the seller is only relying on a price test exemption under the tick test or bit test rule.
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What does a broker dealer need to do to accept an order to sell short an equity security for an account (3)?
The account of a customer or own account needs to
1. Have borrowed the security
2. Have arranged to borrow the security
3. Needs to have a reasonable belief that the security can be borrowed
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What does a broker dealer rely on for short references? When can they use this?
Broker dealer can rely on an easy-to-borrow list of securities as long as the list is less than 24 hours old.
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What must the broker dealer do for sell orders that were marked long? What are the 3 exceptions?
Broker dealer must deliver the securities by settlement date and may not borrow the securities to complete delivery.
Broker dealer may borrow securities to complete delivery under these exceptions:
1. To complete delivery to the buyer when a customer fails to deliver.
2. The security is being loans to another broker dealer.
3. A fail to deliver resulting from a good-faith mistake and a buy-in would create an undue hardship.
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When must a broker dealer close out all customer fails to deliver? What must the broker dealer do in this case?
Within 35 days of the trade date.
| Broker dealer must borrow the securities or buy in the securities of a like kind and quantity
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When must a firm file a short interest report? What is the application called?
Firm must file a short interest report 2x/month for short positions that have settled by the 15th and as of the last trading day of each month, using FINRA's Regulation Filing Application (RFA). All reports are required to be filed with the firm's designated examining authority (FINRA or NYSE) by the end of the second business day following the settlement date
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When securities are not listed on any of the centralized exchanges, where do they trade?
Over the counter or on the Nasdaq
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What does Nasdaq stand for?
National Association of Securities Dealers Automated Quotation System
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What is Nasdaq?
It is an interdealer network of computers and phone lines that allows securities to be traded between broker dealers.
Nasdaq is not an auction market but has been granted exchange status by the SEC (it is a negotiated market).
Broker dealer negotiates price with another broker dealer
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What is a market maker?
They are broker dealers that display bids and offers (this is because there are no specialists for the over-the-counter markets).
A market maker is a firm that is required to display a 2-sided market
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What does a two-sided market consist of?
Consists of a simultaneous bid and offer for the security quoted through the Nasdaq workstation. Market maker must be willing to buy the security at the bid price and willing to sell the security at the offering price (both of these they have displayed and are known as "firm quotes")
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How do market makers make a profit?
Market makers purchase the security at the bid price and sell the security at the offering price. Their profit is the difference between the bid and offer known as the spread
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What are the Nasdaq subscription levels?
Broker dealers will subscribe to the Nasdaq workstation services that meet their firm's requirements. Levels of service are:
1. Nasdaq Level I
2. Nasdaq Level II
3. Nasdaq Level III
4. Nasdaq TotalView
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What does Nasdaq Level I subscription service provide?
Provides information relating to the inside market and provides quotes for registered representatives
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What does Nasdaq Level II subscription service provide? Who is it for?
For broker dealers that are order-entry firms.
Allows broker dealer to see the inside market, as well as the quotes of all market makers and to execute orders over the Nasdaq workstation
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What does Nasdaq Level III subscription service provide? Who is it for?
Highest level of service offered over the Nasdaq workstation
Contains all of the features of Level II and allows firm to enter and update their own makers (only for approved market makers)
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What is Nasdaq TotalView quotation service? What does it display (5)?
Allows professionals and nonprofessionals to view the entire Nasdaq book for securities traded over Nasdaq. TotalView displays the price and size quoted by all market makers, exchanges, and ECNs. Also displays the total size of the market for the five best priced quotes as well as order imbalance information for all Nasdaq crossing sessions.
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What are quoted by a large number of market makers?
The most actively traded Nasdaq stocks.
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What appears as bid and offer in Nasdaq level I subscription for Nasdaq quote? What are the other quotes called?
The highest bid for the security from a market maker has their bid displayed at the top of the list (displayed as best bid to anyone with a Nasdaq Level I subscription).
The lowest offer for the security from a market maker will be listed at the top of the list.
The best bid and offer from any two market makers will make up the inside market
A market maker whose quote is above or below the inside market is said to be away from the market.
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What are firm quotes?
All quotes published over the Nasdaq workstation. A firm quote is always good for at least one round lot or 100 shares; a response of "it is" would indicate a firm quote
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What is a nominal Nasdaq quote?
Dealers who provide quotes over the phone that are clearly indicated as being subject or nominal cannot be held to trade at those prices. Nasdaq qualifiers are: "It looks like", "It's around", "subject", "nominal", "work it out", "last I saw"; A dealer who fails to honor their quotes has committed a violation known as backing away
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Where are most Nasdaq trades executed?
Over the Nasdaq workstation using one of its automated execution systems; these systems allow dealers to execute orders without having to speak with one another over the phone
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What is the NMCES?
The Nasdaq Market Center Execution System
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What type of orders does the NMCES accept?
Accepts market orders and immediately executable limit orders for both customer and firm accounts. Orders may be entered for up to 999,999 shares per order
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How are the orders executed on NMCES?
Orders will immediately be routed to dealers on the inside market for automatic execution. Larger orders may be split up to meet the maximum order volume. However, a broker dealer may not split orders that would otherwise be able to be entered into the Nasdaq system in an effort to increase fees or rebates (this is a violation referred to as "order shredding"
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Where are orders executed through the Nasdaq execution system automatically reported to?
ACT
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When does the Nasdaq opening cross begin? What happens at this time?
9:28AM
At this time, the Nasdaq execution system automatically executes orders; orders placed after 9:28AM may not be canceled and can only be changed if it makes the order more aggressive.
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What makes an order more aggressive?
A change that increases the size of the order or improves the price would make the order more aggressive.
For a buy order, an improved price would be a higher limit price; for a sell order, an improved price would be a lower limit price.
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What does the opening cross determine? What about closing cross?
Opening cross creates the Nasdaq official opening price (NOOP), closing cross determines Nasdaq official closing price
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What is the non-nasdaq OTCBB? What 2 things are often quoted here?
OTC bulletin board that provides two-sided electronic quotes for OTC securities that cannot meet the listing standard of an exchange or Nasdaq. DPPs and ADRs will often be quoted on the OTCBB
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What is the Pink OTC?
Securities that do not qualify for listing on the Nasdaq, or that have been dislisted from Nasdaq or one of the exchanges, may be quoted on the Pink OTC.
The Pink OTC Market is operated as an electronic marketplace
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What does the Pink OTC market display?
Pink Sheets which are firm quotes
| Also provides a list of phone numbers for market makers who display subject quotes.
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What are penny stocks on Pink OTC Market?
Stocks quoted on Pink OTC market trading at under $5/share
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What is a firm that executes a customer's order for a Pink OTC security required to do?
Required to make a reasonable effort to obtain the best price for the customer.
Firm is required to obtain quotes from at least 3 market makers for the security prior to executing the customer's order. If the security has less than 3 market makers, the firm is required to obtain a quote from all market makers.
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What does the third market consist of?
Consists of transactions in exchange-listed securities executed over the counter through the Nasdaq workstation. When a broker dealer wishes to simply purchase or sell an exchange-listed security directly with another brokerage firm instead of executing order on the floor of the exchange, these transactions are referred to as third-market transactions.
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Where are all third-market transactions reported?
TRF to the consolidated tape for display
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What is a fourth-market transaction?
Transaction between two large institutions without the use of a broker dealer
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What is the computer network that facilitates fourth market transactions?
INSTINET
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What trades on the fourth market?
Large blocks of stock, both listed and unlisted
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What are not considered part of the fourth market?
Proprietary trading system transactions because these systems are either registered as broker dealers or are operated by broker dealers
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When is firm acting as broker?
If it is acting as the customer's agent and is merely executing the customer's order for a fee known as a commission; role of broker is to find someone willing to buy investor's securities if they are selling or find someone willing to sell them securities if they are buyers. Broker: executes customer's orders, charges a commission, must disclose the amount of the commission
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When is firm acting as a dealer?
When it participates in the transaction by taking the opposite side of the trade. For example, firm may fill a customer's buy order by selling the securities to the customer from the firm's own account or the dealer may fill customer's sell order by buying the securities for their own account. A brokerage firm is always acting as a dealer or in a principal capacity when it is making markets over the counter
Dealer: participates in the trade as a principal, charges a markup or markdown, makes a market in the security and must disclose the fact that they are a market maker, but not the amount of markup or markdown
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What charge does FINRA consider to be reasonable as a guideline to ensure the prices investor pay and receive for securities are reasonably related to the market for the securities?
FINRA 5% Markup policy
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What factors (5) go into determining reasonable markup rate?
1. Price of security
2. Value of the transaction
3. Type of security
4. Value of the member's services
5. Execution expenses
When a customer is executing an order for a low price or low total dollar amount, a firm's minimum commission may be greater than 5% of the transaction
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A firm that executes customer orders on a principal basis is entitled to what?
A profit on those transactions
If firm is selling securities to the customer, they will charge the customer a markup, if the firm is buying securities, they will charge customer a markdown
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To determine the minimum or maximum price for a customer for an order, what are the rules for markup/markdown?
105% of the offer price for customers who are purchasing the security
95% of the bid price for customers who are selling the security
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What 2 things are excluded when determining amount of markup or markdown?
1. Firm's actual cost
| 2. Firm's quote if they are a market maker in the security
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What is a riskless principal transaction?
If a brokerage firm receives a customer order to buy or sell a security and the firm does not have an inventory position in the security, the firm may still elect to execute the order on a principal bases.
Because the dealer is only taking a position in the security to fill the customer's order, the dealer is not taking on any risk
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Hos is the markup/markdown determined for a riskless transaction?
Based on the dealer's actual cost, not on inside market
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What are the rules with markup in a proceeds transaction?
In a proceeds transaction, the customer sells a security and uses the proceeds from that sale to purchase another security on the same day.
FINRA's 5% policy states that a firm may only charge the customer a combined commission or markup and markdown of 5% for both transactions, not 5% each
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What is arbitrage?
An investment strategy used to take advantage of market inefficiencies and to profit from the price discrepancies that result from those inefficiencies.
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What are the 3 types of arbitrage?
1. Market arbitrage
2. Security arbitrage
3. Risk arbitrage
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What is market arbitrage?
Securities that trade in more than one market will sometimes be quoted and traded at different prices.
Market arbitrage consists of the simultaneous purchase and sale of the same security in two different markets to take advantage of the price discrepancy.
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What is security arbitrage?
Securities that give the holder the right to convert or exercise the security into the underlying stock may be purchased or sold to take advantage of price discrepancies between that security and the underlying common stock. Securities arbitrage consists of the purchase or sale of one security and the simultaneous purchase or sale of the underlying security
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What is risk arbitrage?
Risk arbitrage tries to take advantage of the price discrepancies that come about as a result of a takeover. A risk arbitrageur will short the stock of the acquiring company and purchase the stock of the company being acquired.
