Chapter 1

the following are test Qs

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clearing options contracts

(Ch 10) Options are *derivative* trading products that track the value of an individual stock, an index, or foreign currency. Options contracts can be purchased either on one of the options exchanges or in the over-the-counter market. *Options contracts that are purchased on an exchange are referred to as listed options.* -Currently, listed options trade on the following exchanges: ---The Chicago Board Options Exchange (CBOE) ---The Boston Options Exchange (BOX) ---The NYSE Arca ---The Nasdaq PHLX (formerly the Philadelphia Stock Exchange) ---The International Securities Exchange (ISE) -A key feature of exchange-traded options is standardization, which means that the terms of the contracts are set and uniform. The DTCC doesn't clear options trades; instead, this is the job of the Options Clearing Corporation (OCC).

clearing and settlement

(sometimes referred to as *the back office*) -after a trade occurs, the buyer and seller must agree on the terms of the transaction *(clear the trade).* Ultimately, the buyer is expected to pay for the security, and the seller is expected to deliver the security. This simultaneous payment and delivery process between the two parties is referred to as *settlement.* -The modern securities clearing process is a complicated one that involves many parties that are tied together by various computer and communications systems. -this whole process includes the *DTCC, Clearing firms, introducing firms, the OCC,* many different personnel, etc.

the OCC vs DTCC

*DTCC*: provides clearing, settlement, and information services for its members. They guarantee settlement between the brokerage firms so brokerage firms deposit funds with them and then they move them around, so they eliminate counterparty risk. The clearing companies remove the risk by acting as a seller for every buyer and buyer for every seller but they dont interact with customers, just brokerage firms. *DTCC is primary stocks and bonds.* -*OCC*: is the options clearing corp. *They do what the DTCC does but with options.* The OCC guarantees all option or exchange trades options or listed options. They create no counterparty risk in the option market, where the same function is done with the DTCC with equity and fixed income

Which of the following statements is NOT TRUE concerning a clearing corporation? A. It provides trade comparison and reporting services. B. It is responsible for automated book-entry changes in the ownership of securities. C. It assists broker-dealers in transferring assets in a customer account to another broker-dealer. D. It offers customers the ability to have real-time trade matching.

*It is responsible for automated book-entry changes in the ownership of securities.* The responsibility for automated book-entry changes in the ownership of securities is a function of a depository facility (e.g., the DTC), not a clearing corporation. Each of the other choices are functions of a clearing system, such as the National Securities Clearing Corporation (NSCC).

3 types of investors

*retail, institutional and accredited investors* (By specifically defining both institutional and non-institutional (retail) investors, securities regulators are able to create rules which are applicable to only one type of investor. If you are not considered an institutional investor then by default you're considered a retail investor)

Other secondary market terms/other execution methods and venues

*third market, fourth market, electronic communication markets, and dark pools* -In recent years, market participants have created alternatives to the NYSE and Nasdaq for trading listed securities. Many broker-dealers have abandoned their market making operations on the traditional exchanges and directed orders to high frequency trading firms. Other broker-dealers have found alternative trading venues which compete with the NYSE and Nasdaq for trading volume.

accredited investor

-*NOT* the same as an institutional investor -the SEC categorizes certain investors who, by the nature of their income or assets, are viewed as more sophisticated and/or able to assume greater risk. These investors are referred to as accredited investors and include the following: -financial institutions (eg banks), large tax-exempt pension plans, and private business development companies -directors, executive officers, or general partners of the issuer -individuals who meet either of the following 2 criteria: ---have a net worth of at least $1,000,000 (excluding their primary residence) or ---have a gross annual income of at least $200,000 (or $300,000 combined with a spouse) for each of the past two years, with the anticipation that this level of income will continue -accredited investors therefore can be an institutional investor or just an individual, even retail These *can be individuals*, unlike institutional investors. institution PLUS certain individual, even retail

sales and trading (department within a securities firm)

-*secondary market* -sales personnel market individual stocks or bonds to both retail investors and institutions. they also buy and sell packaged products like mutual funds -these personnel are often referred to as *brokers* but the SIE likes to call them *registered representatives (RRs)* or *investment adviser representatives* (IARs) -Trading professionals handle the execution of trades for both the firm's clients and the firm's own (proprietary) account. These trades may occur either in electronic marketplaces, such as Nasdaq, or hybrid marketplaces, such as the New York Stock Exchange (NYSE).

Investment adviser (IA)

-Many financial firms act as investment advisers, rather than functioning as broker-dealers. -investment advisers charge *fees* for providing advice to their clients. These fees are often based on a percentage of assets under management (AUM) and are charged regardless of whether any trades occurred in their clients' accounts.

listed securities

Any equity securities that meet the standards for trading on a national exchange (e.g., NYSE and Nasdaq) are referred to as listed securities.

spread

-The spread represents the profitability of the market maker -The spread represents what the market maker would buy and sell from, and the firm might charge a higher or lower price. -so you might bid 17.05 for a share but the issuer only gets $17 so that 5 cents is the markdown. if the firm marks the $17.15 ask/offer price up to 17.20, that 5 cents is the markup. so the 5 cent markdown and markup are additional to the spread -Consequently, if a brokerage firm was not a market maker and they bought from this market maker at 17.15, instead of being charged a markup or markdown they will be charged commission, adding to the 17.15 or subtracting from the 17.05.

dealer

-a *dealer* is defined as any person that engages in the business of buying and selling securities for its own accounts. firms acting as dealers engage in *principal* transactions in which they buy securities directly from their clients and hold them in inventory, or they sell securities to clients from that inventory. For executing these trades, dealers are entitled to either a markup or markdown as their compensation. -there is risk because the firm is using its own capital to buy -like a house flipper: they act in the principal capacity meaning they take the other side of the trade (at a markdown), and might hold or resell the equities at a markup -*PDM*: dealers act in a *principal* capacity, as a *dealer*, and they earn *markup/markdown*

bond securities

-aka notes or bonds, debt instruments, fixed income -represents an issuer's promise to pay. it is a security that represents the amount of indebtedness (principal) that the issuer owes to the investor -investors who purchase bonds are considered *creditors* of the issuer and essentially lend their funds to the issuer for a specified period of time (until maturity) -the issuer is required to repay the principal balance of the bond at a future date and will typically make interest payments over the life of the loan -if an issuer misses an interest or principal payment, it is considered to be in *default* -used by all entities listed (Corporations, US Treasury and government agencies, State and local governments (municipal issuers), Foreign governments, Banks)

investment banking

-deal mostly with the issuers who need to raise capital -they act as an underwriter in the *issuance* of new securities -they handle *mergers and acquisitions* (M&A) representing parties when one company wants to merge or acquire another company, they also help companies who are bankrupt and need to restructure -they handle *private equity* which is basically using the firm's own money to make investments in companies -they deal with *debt and equity capital markets* by helping companies sell these equities to gain capital

compensation for dealers vs brokers vs market makers

-dealers make markups/markdowns *PDM* -brokers/agents make commission *ABC* -market makers make spreads

equity securities

-used by corporations and banks mainly -represents ownership -*common stock and preferred stock* -when a company goes public and sells a percentage of the company, that is called equity -if an investor buys stock, they have ownership interest and if the company is profitable they may be entitled to a portion of the profit through a dividend distribution -no maturity date--payment of dividends is voluntary for the issuer

hedge fund

A hedge fund is a private, actively managed investment fund that uses sophisticated strategies in an attempt to generate returns that are higher than traditional stock or bond investments. These strategies could include: --Concentrated speculative investments on a given company or industry --Arbitrage (a relational trade between two investments) --Short selling (speculating on the downward movement of a company's stock) --Currency or commodities trades --Margin (the use of leverage

market makers

A market maker is a broker-dealer that chooses to display quotes to buy or sell a specific amount of securities at a specific price. In most cases, a market maker is required to make regular bids and offers and meet specific capital requirements. -the term market maker generally applies to equity securities, not debt securities

Market makers' quotes

A market maker's quote is two-sided since it indicates the price at which it's willing to buy a security from (bid), or sell a security to (ask/offer), other market participants. -Quotes are firm (obligated to buy and sell) for at least 100 shares. This means that generally, a market maker must be prepared to buy or sell a minimum unit of trading (100 shares) at the quoted prices. -if a bid is 17.05 and the ask/offer is 17.15, that $0.10 is the *spread* -The wider the spread, the more the market maker makes. Narrower the spread, less the MM makes -Very actively traded securities generally have very narrow spreads like in Apple, the spread might be only a few cents. A security that is not that actively traded could have higher spread like 20 cents or even a dollar depending on the activity. The more actively traded, usually the smaller the spread.

the secondary market

After the primary distribution of the issuer's shares, the investors that purchased the shares from the issuer will inevitably want to sell them. The market that brings together these buyers and sellers is referred to as the secondary market. In the secondary market, the funds are no longer directed to the issuer; instead, the securities and the funds pass between investors -the secondary market refers to the trading and *exchange* of equity from companies that have gone public through an IPO -There are physical exchange locations like the NYSE, but there are also other types of exchanges that are non-physical electronic exchanges.

information barriers

Aka *Chinese walls*. basically the different departments within a firm must be separated by physical or electronic barriers to avoid the sharing of information across departments. otherwise information may slip between departments and cause them to act in advance of public information, which can lead to insider trading -different floors and stuff are common too

electronic communication networks (ECNs)

ECNs are the market centers (ie exchanges) that allow for *both the quoting and trading of exchange-listed securities.* -The objective of an ECN is to provide an electronic system for bringing buyers and sellers together (matching). These systems allow subscribers to disseminate information about orders, execute transactions both during the trading day and after-hours, and buy and sell anonymously. -ECNs charge subscribers a *fee* for using their systems and act in only an agency (broker) capacity.

difference between investment adviser firms and broker-dealer firms

Essentially, it comes down to how each is compensated for the services it provides. Broker-dealers earn compensation (e.g., commissions) for executing transactions, while investment advisers charge fees for providing advice to their clients based on the amount of AUM -investment adviser fees are charged regardless of whether any trades occurred in their clients' accounts, whereas broker-dealers receive transactional-based compensation (commission); when they buy and sell they earn the markups/markdowns, commissions.

securities trustees

For some types of investments, such as select bonds, loans, or trusts, a trustee is assigned to hold security interests that are created on trust for the benefit of various creditors (e.g., banks or bondholders). Some bond trustees also ensure that issuers abide by promises (covenants) that are found in a formalized agreement which is referred to as a *trust indenture.* Additionally, these trustees may represent investors in the event of default and/or bankruptcy.

other entities that keep the markets running smoothly

In addition to DTCC, there are other types of financial institutions that help keep the equity, bond, and options markets operating smoothly. These intermediaries include *custodians, transfer agents, registrars, and trustees*. Each of these institutions are described in this final section.

institutional investors

Institutional investors are typically large entities that pool their money to purchase securities. They are defined based on the amount of assets they have invested. -Institutional investors include banks, insurance companies, investment companies, corporations, partnerships, public and private pension plans, endowments, and hedge funds. -The SEC refers to certain institutions as *qualified institutional buyers (QIBS)*; however, to be considered QIBs, the buyers must satisfy a 3 part test

registrars and transfer agents

Issuers that have publicly traded securities outstanding typically use banks or trust companies to keep track of the owners of their stocks and bonds. Typically the firms that provide recordkeeping services act as both registrar and transfer agent. -A *registrar's* function is to maintain the ownership register of the issuer for each issue of its securities. The registrar records the name, address, and tax identification or Social Security number of each individual owner. These securities may be held in certificate form or by the investor's brokerage firm in street name (i.e., in the name of the broker-dealer). -The *transfer agent* is responsible for: ---The issuance and cancelation of certificates to reflect changes in ownership ---Maintaining a list of current shareholders who are eligible to receive additional shares after a stock split ---Acting as the company's paying agent for interest payments on bonds and for cash or stock dividends on equities ---Acting as proxy agent (sending voting materials) and mailing agent (mailing the company's financial reports to shareholders) ---Handling lost, destroyed, or stolen certificates

custodians

Issuers typically use banks or other financial institutions to hold customers' securities for safekeeping. Although a custodian may hold assets in physical form, it's much more common for securities to be held in book entry (electronic) form.

The Options Clearing Corporation (OCC)

Listed options are issued and guaranteed by the Options Clearing Corporation much in the same way that the DTCC guarantees locked-in trades for its members. The OCC is regulated by the Securities and Exchange Commission and is owned proportionately by the exchanges where listed options trade. -The OCC acts as the third party in all *option* transactions. Broker-dealers deal directly with the OCC rather than with each other when settling trades. When customers buy or sell option contracts, their broker- dealers must settle the transactions with the OCC within one business day.

exchanges-- market-makers

MMs stand ready to buy or sell at least 100 shares at a time at their quoted prices. That firm that was contacted is called the market maker, and they're subject to SRO rules - *self-regulatory organization rules*

fully disclosed accounts

Many introducing firms operate through a clearing firm on a fully disclosed basis. This means that information about each of the individual customers of the introducing firm will be transmitted to the clearing firm and the clients' assets are held at the clearing firm. -The clearing firm establishes separate accounts for each client and is responsible for all of the paperwork associated with the accounts, such as the delivery of confirmations and statements. -The paperwork will be identified as coming from the clearing firm, but it will contain additional identifying information so that the client can determine to which introducing firm the paperwork is related. -For example, a client's statement may list ABC Clearing at the top of the document, but will also contain the name and contact information for XYZ Brokers, the introducing firm. -Basically a clearing firm is responsible for the individual customer's info. Then you have to pay less because there is less paperwork

the OTCBB and the Pink Marketplace

Neither the OTCBB (OTC Bulletin Board) nor the Pink Marketplace are registered as exchanges with the SEC and typically don't have the same level of trading activity as the NYSE and Nasdaq. *These are not exchanges*, instead they are quotation systems -The OTCBB *must* be reporting companies, whereas the OTC Pink Markets may be non-reporting companies -Ex. you want to buy 1,000 shares of nintendo. You contact your brokerage firm, they say they don't make a market in this stock-they don't normally buy and sell this stock and there's no reason to make a market in this stock. This brokerage firm would go to a trader and that person would find out which brokerage firms are willing to make a market in nintendo. Then they would access the OTCBB or the pink markets (quotation systems) and they would see which brokerage firms are willing to buy/sell shares of nintendo. The brokerage firm would then buy the shares for you, act as your agent, and charge you a commission.

omnibus accounts

Not all of the relationships between introducing and clearing firms are fully disclosed. For example, ABC Bond Brokers, Inc (they are the introducing firm) is a fixed-income broker-dealer that has a complete back-office operation for clearing its bond trades and holding customer positions. However, the firm will occasionally accept an order from a customer for common stock. Since the firm doesn't want to set up clearing operations to handle these infrequent accommodation transactions, it has arranged for DEF Clearing to execute and clear its customers' stock trades. ABC doesn't provide DEF Clearing with details regarding the individual clients. Instead, ABC uses a single omnibus account that's specifically designated by the clearing firm for customers of ABC Bond Brokers. In this type of arrangement, since the clearing firm doesn't have information on each individual customer, the recordkeeping responsibilities belong primarily to the ABC Bond Brokers, the introducing firm. -Here, the introducing firm does the record keeping. Pay more because more paperwork

traders

Other firms and individuals that simply choose to trade securities for the firm's benefit (proprietary trading) or for the benefit of the firm's clients (without the interest in making markets) are referred to as traders. These traders are under no obligation to enter quotes into a marketplace; instead, they execute trades against the quotes of market making firms.

QIBs

Qualified Institutional Buyers -The SEC refers to certain institutional investors as qualified institutional buyers (QIBS); however, to be considered QIBs, the buyers must satisfy the following three-part test: -1. Only certain types of investors are eligible, including: ---insurance companies ---registered investment companies ---registered investment advisers ---small business development companies ---private and public pension plans ---certain bank trust funds ---corporations, partnerships, business trades, and certain non-profit orgs -2. the buyer must be purchasing for its own account or for the account of another QIB -3. the buyer must own and invest at least $100 million of securities of issuers that are not affiliated with the buyer -Under no circumstances is an individual (even one who meets the standard of being an accredited individual investor) considered to be a QIB. Remember, *QIBS are not humans, they're entities (e.g., firms)*. a QIB is way above an accredited investor

the Depository Trust and Clearing Corporation (DTCC)

The Depository Trust & Clearing Corporation is a securities depository and a national clearinghouse for the settlement of transactions in equities, corporate, municipal, and U.S. government bonds, mortgage- backed securities, money-market instruments, and over-the-counter derivatives. -The DTCC also has significantly expanded its ability to process transactions in mutual funds and insurance products. -The DTCC's function is to automate and centralize the clearing and settlement of trades among its (owners) members. Most major financial institutions in the U.S. are members of the DTCC system. The primary goal of the system is to eliminate physical securities in order to increase the speed and reduce the cost of clearing and settling trades. -The National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC) are both subsidiaries of the DTCC. The NSCC clears equity trades for both U.S. and foreign issuers, while the FICC clears bond/debt trades. -The DTCC is a non-profit, industry-owned corporation. Its owners include broker-dealers, investment banks, commercial banks, and mutual fund companies. The DTCC and its subsidiaries are regulated by the SEC and the depository is also a member of the U.S. Federal Reserve System.

NASDAQ

The National Association of Securities Dealers Automated Quotation System (Nasdaq) is perhaps the most recognized equity *dealer-to-dealer network*. Although it wasn't always the case, the SEC classifies Nasdaq as a securities exchange. The Nasdaq system provides quotes on select securities that have been properly registered and meet specific listing criteria, such as aggregate issuer assets, the number of shareholders, and the number of outstanding shares.

The networks that provide dealers with quotes on unlisted securities/OTC equities

The OTC Bulletin Board and the Pink Marketplace

fourth market

The fourth market refers to *direct institution-to-institution trading* and doesn't involve the public markets or exchanges. -Most true fourth market trades are internal crosses set up by money managers/broker dealers that execute trades for institutional accounts. To execute fourth market trades, you use *dark pools*. -These *proprietary trading systems (PTSs)* are established to facilitate the institution-to-institution trading and are often considered a part of the fourth market. -(Essentially, the third market involves transactions between dealer-brokers and large institutions, while the fourth market only involves transactions between large institutions. The activities of these markets have little or no influence on the workings of the typical stock trading by an average investor.)

the Third Market

The third market refers to *exchange-listed securities being traded over-the-counter or away from traditional exchanges*. Say IBM or Disney is listed on the NYSE but someone buys and sells it away from the floor of the NYSE between brokerage firms, that's the third market. -While some of the trading in listed stocks still occurs on their primary exchanges, third-market volume has grown in the last several years. In a manner that's similar to traditional exchanges, the third market brings together investors and also accommodates *after-hours trading.*

Municipal Advisors (MA)

There is a special type of investment advisor that deals with state and local governments known as Municipal Advisors (MAs) -An MA is a person or firm who advises municipalities on bond offerings and must be registered with the SEC -Typically advise issuers (states, counties, cities, etc) regarding structure and timing for a new offering. So the *issuer is their client, not the investor* -The municipal advisor definition is broad and includes financial advisors, third-party marketers, placement agents, solicitors, finders, and swap advisors that engage in municipal advisory activities. -eg. a town intends to issue bonds to raise funds for the construction of a new gymnasium. If the mayor and members of the town council lack the necessary financial or securities knowledge, they may hire a municipal advisor to act as an intermediary between the town and the underwriter. -A brokerage firm might act as an underwriter (who will sell the securities) and the town is the issuer trying to sell, and there must be an intermediary between the brokerage firm and the town-- that is the Municipal Advisor (MAs)

exchanges-- non-equities

Unlike equity securities, corporate, municipal, and U.S. government bonds don't have organized exchanges. Although some corporate bonds (e.g., convertible bonds) can be bought and sold on certain stock exchanges, most bonds are traded in the OTC market through various dealer-to-dealer networks.

dealer-to-dealer market

When stocks don't qualify for listing on either a physical or electronic exchange, they're considered to be *trading over-the-counter (OTC)* and the stocks are referred to as *OTC equities* or *unlisted securities*. These are also called "non-exchange issues" (OTCs). -In OTC markets, trades occur in non-physical dealer-to-dealer networks that connect participants through phones or, more likely, computers. -Two networks which provide dealers with quotes on these securities are the OTC Bulletin Board (OTCBB) or the Pink Marketplace (a platform that was created by the OTC Markets Group).

broker

a *broker* is defined as any person that engages in the business of effecting *agency* transactions in securities for the account of others; they match up buyers and sellers and earn a *commission* for their efforts. -ABC (they act in an *angency* capacity, being a *broker*, and charging a *commission*) -no risk to the firm because they're not using their own capital to buy these equities -like a real estate agent who finds a seller and a buyer

omnibus vs fully disclosed accounts

a clearing broker may provide introducing firms with back office and related recordkeeping functions on either a fully disclosed or omnibus basis -The differences between these two arrangements involve the level of detail the clearing firm will have regarding the customer as well as which entity will be responsible for providing trade details to the customer.

Dark Pools

a dark pool is a system that provides liquidity for large institutional investors and high-frequency traders, but it doesn't disseminate quotes -The name is derived from the fact that the details of the quotes are concealed from the public. The system may be operated by broker-dealers or exchanges, and it allows these specific investors to buy and sell large blocks of stock *anonymously* (that's also why it's called a dark pool) -The objective is to allow these investors to trade with the least amount of market impact and with low transaction costs. -called dark pools because theyre anonymous and allow primarily institutional investors to remain anonymous and withhold details about quotations. That limits the impact on the public markets

Issuer

a legal entity that sells securities in order to raise capital to finance its operations. Issuers include businesses that need capital to grow and prosper, as well governments that typically borrow funds as a means of paying their bills or building infrastructure. These typically include: -Corporations -US Treasury and government agencies -State and local governments (municipal issuers) -Foreign governments -Banks

the primary market

aka the *new issue market* -The way that the securities market is structured involves the *issuance* of the securities in one market (the primary market) and the *trading* of the securities in another market (the secondary market). -the primary market is where the issuer is selling securities to raise capital. So they hire an *underwriter.* The underwriter is a brokerage firm that, using the investment banking department, buys the securities from the issuer and resells those securities directly to the investor. -the underwriter connects the issuer and the investor -The primary market is regulated by the SEC under the Securities Act of 1933

investment management (department of a securities firm)

asset management and advisory services reside in this department

customers of clearing firms

clearing firms traditionally services smaller broker-dealers, but they also do business with investment companies (mutual funds), investment advisers, and hedge funds

operations (part of departmental securities firm section)

ensure that all paperwork, funds and securities transfers associated with a trade are handled efficiently and appropriately -they keep records, help with transfers, and make sure things stay safeguarded

two types of securities

equity securities (stocks) bond securities (i.e. notes or bonds)

two categories of financial firms

financial firms are the bridges that connect issuers and investors. there are 2 broad categories: -*broker-dealers* -*investment advisers*

two primary methods that issuers use to raise capital

issuing debt securities (bonds) and issuing equity securities (stocks).

the structure of a securities firm (departments)

often include: -investment banking -research -private client -sales and trading -investment management

retail investor

pretty much anyone who doesn't meet the definition of an institutional investor -Many investors who directly buy stocks or bonds from broker dealers are retail investors. Essentially, this term means "regular individuals" who have limited assets and income. These investors may hold assets in one person's name (a single account) or perhaps together with their spouse or a friend (a joint account). Other forms of retail ownership include various retirement accounts, such as IRAs, or custodial accounts that are established for children. The primary focus of securities regulation (Chapter 2) is on protecting these retail investors. Many professionals define a retail investor as a person who doesn't meet the definition of an institutional investor

private client (also known as retail brokerage)- department in a securities firm

some firms have a division called *private wealth management* which caters towards more upper income individuals-- they're dealing with investors, not so much the issuers

broker-dealers

term broker-dealer refers to the two capacities in which a firm may operate. brokers and dealers act slightly differently, but since firms are continuously executing trades as either a broker or a dealer, it's convenient to simply refer to them as broker-dealers.

how the clearing and settlement system works

the DTCC is like a book keeping system, and most major financial institutions in the U.S. are members of the DTCC system. -One step below the DTCC on the trade processing hierarchy are the *clearing firms (also referred to as full-service firms)*. These substantial broker-dealers perform order execution, clearing, and settlement functions. Clearing firms interface with the DTCC directly for both their own transactions as well as those of any other broker-dealers that choose to clear through them. -firms can either clear their own trades, or smaller firms, known as *introducing* firms or correspondents, can clear their trades on an omnibus or fully disclosed basis.

clearing and introducing firms

the clearing process will often involve two different types of firms—clearing firms and introducing firms. -Due to the cost and complexity of creating and maintaining a fully functional trade processing area, many *smaller broker-dealers (introducing firms)* choose to hand off all or part of their trade processing and clearing functions to *larger broker-dealers (clearing or carrying firms)*, because the costs of clearing include a significant investment in hardware, software, and personnel. -Introducing firms neither process customer transactions nor do they operate their own clearing operations. Instead, they contract with clearing firms to perform these services. While customers of an introducing firm consider that firm to be their broker-dealer, customer funds and securities are actually physically held at the clearing firm, from which they generally also receive statements and confirmations. The clearing process goes from the DTCC, then down to the clearing firms, then to smaller introducing firms

exchanges-- traders

the trader executes trades for their firm or their firm's clients. They don't maintain an inventory. (that's how they're different from a MM I guess?). They bought the nintendo shares from the market maker. They might make a market in that security if they know their clients are wanting to buy that stock.

IPO vs Follow On

these terms only apply to equity securities -when a company goes public for the first time, that is called an *initial public offering, or IPO* -companies often don't sell 100% of shares when they first go public, they might sell just a portion and then later sell more when they want to raise more capital. that is called a *"follow on offering"*. If an existing company wants to sell equity securities at a future point in time that is called a follow on offering, they can have multiple

markups and markdowns

they will buy the equity at a lower *bid*, and sell it for a higher *ask*

prime brokerage accounts

think of this as first class brokerage as opposed to coach or business class. One service that clearing firms typically offer is prime brokerage. The prime brokerage relationship consists of a bundled package of services that's offered to hedge funds, institutions, and high net worth individual clients. The clearing firm acts as a centralized location for holding all of the positions that were created by the various executing firms through which the client trades. Basically just an aggregation of all of a customer's holdings in different brokerage firms, and they collect all the data and give it to a client in one nice and neat report instead of constant reports form all different firms -this way there are less statements and positions are easier understood -In a prime-brokerage arrangement, the client chooses one firm as its prime broker to consolidate the bookkeeping process. Although the client may still use several broker-dealers for execution purposes (and as a source of research, allocations on IPOs, etc.), all of the trades are ultimately handled through its account at its prime broker. Therefore, the client receives one set of reports, rather than several.

research (department of a securities firm)

this team often provides research reports to recommend when companies should be bought and sold and for how much -if she thinks apple is an undervalued security, she will advise to buy, and overvalued, she would recommend to sell -they create *price targets* to estimate the price of the security in the near future

exchange market

used to be divided into physical trading venues like the NYSE and over-the-counter (OTC) marketplaces but now they're all kind of hybrids. NASDAQ and NYSE are some major ones -Exchanges offer a centralized trading venue that functions as an open outcry auction market. The auctioneer who controls trading in a given stock is referred to as a *designated market maker (DMM).* -Any equity securities that meet the standards for trading on a national exchange (e.g., NYSE and Nasdaq) are referred to as *listed securities.*

a round lot

when market makers buy and sell, their quotes are firm for 100 shares, meaning the market maker must be prepared to buy or sell a minimum unit of trading (100 shares) at the quoted price -5 round lots is 500 shares. Most people like to buy in round lots. -If youre buying in 50s or 25s or something, thats an "odd lot"

street names

when most brokerage firms buy and sell for customers they do it in street names -Street name is when the brokerage firm buys securities on behalf of me, but the book doesn't record my name it just records the brokerage firm's name. That's called street name