Chapter 16
Minimum initial dollar requirement in a short margin account
$2,000
Acting as an Agent when selling a stock
(Broker in BD) Charge the customer the same price it paid for the stock plus a commission
Acting as Principal when selling a stock
(Dealer in BD) It buys the stock from the market maker at the ask price. Then, following the FINRA 5% policy, it adds a markup to its cost to sell to the customer
Reductions for Stock Splits/Dividends
** All orders are adjusted for stock dividends and stock splits, whether placed above or below the market. The DMM will adjust all open orders. example: There is an open order to buy 500 ABC at 30. If there is a 20% stock dividend, the order becomes buy 600 ABC at 25. ** Only round lots are allowed on the order book. A 100 share order cannot become 125 bc of a stock dividend.
cannot be bought on margin but can be used as collateral after 30 days
- Mutual Funds - New issues
Why use sell stop orders?
- Protect against loss in a long stock position - Protect a gain from a long stock position - Establish a short position when a breakout occurs below a line of support
Why use buy stop orders?
- Protect against loss in a short stock position - Protect a gain from a short stock position - Establish a long position when a breakout occurs above a line of resistance
Cannot be purchased on margin and cannot be used as collateral:
- Put and Call options - Rights - Non-nasdaq OTC issues not approved by the Fed Reserve Board - Insurance Contracts
Who can you borrow shares from?
- The member firm executing the sale - Margin customers of that member firm - Other member firms - Institutional investors (pension plans, custodial banks)
may be purchased on margin and used as collateral
-Exchange-listed stocks, bonds -Nasdaq stocks -Non-Nasdaq OTC issues approved by the FRB -Warrants
Alternative Orders (OCO)
-one cancels the other -if one of the orders is executed, the other is immediately canceled Ex: I have a stock I bought at 30 currently trading at 50. I enter a sell stop at $48 to avoid loss and a sell limit order at $53 to capture gain.
Day Trader
-one who buys and sells the same security on the same day to try to take advantage of intraday price movements
Order of Trades with same bid or offer
1) Priority (FIFO) 2) Precedence (Largest) 3) Parity (Random)
Level 2 Halt
15 min halt if 13% decline in S&p from 9:30-3:25 At or after 3:25 PM - trading may continue unless there is a Level 3 Halt
Level 1 Halt
15 min halt if 7% decline in S&P from 9:30am-3:25pm At or after 3:25 PM - trading may continue unless there is a Level 3 Halt
Level 3 Halt
20% decline in S&P 500 At any time -- trading shall halt and not resume for the rest of the day
Minimum Maintenance in a Short Account
30% of SMV 100% of SMV or $2.50 per share (whichever is greater) for stock trading under $5.00 Only when SMV exceeds $16.67 will the requirement be 30%. If it's less, than $5/share is the minimum.
Maintenance Margin Call
A demand that the customer make a payment to bring the account back to minimum. This can be done by depositing cash or with fully paid marginable securities. If the customer does nothing, the BD will liquidate securities in the customer's account as needed.
Do Not Reduce (DNR)
A designation on an order that the price should not be reduced for subsequent cash dividends.
Firm for an hour with 5-minute recall
A firm quote that remains good for an hour. If within that hour the MM receives another order for the same security, the trader calls the BD back and gives it 5 minutes to confirm its order or lose its right to buy that security at the price quoted. Out-Firm
Margin Agreement
A legal agreement between a customer and a broker to open a margin account.
Restricted Account
A margin account in which the equity is below the initial FRB equity requirement, but greater than or equal to the minimum maintenance requirement. Customer doesn't really have to do anything here.
Net Price
A markup (added to the ask) or markdown (subtracted from the bid) was on the sale, not a commission.
Credit Agreement
A part of an overall margin agreement that discloses the nature of a loan made by a broker-dealer to its customer, and discloses interest computations.
Qualified Quotes
A quote will often be given with qualifiers intended to allow the broker/dealer to back away if market conditions change.
Stop Limit Order
A stop order that becomes a limit order after the specified stop price has been reached or passed. Could leave you without execution if the stock price jumps between the stop and limit price. May be better to do a simple market order or stop order.
Mark to Market
Adjusting the value of a security to reflect current market values. MARGIN ACCOUNTS are marked to the market to ensure compliance with maintenance requirements. When the stock price increases, the equity in the account goes down.
Reverse Splits
All open orders are canceled.
Buy Stop Limit Order
An investor wants to buy the stock if it rises to $25, but does not want to pay more than $26.. B 100 ABC @ 25 Stop Limit 26 When the stock price hits 25, the limit order is triggered, which means if the price stays between 25 and 26, it will be executed. If the stock jumps to $26.02, it will not be executed and the investor missed their opportunity.
Sell Stop Limit Order
An investor wants to sell the stock (currently trading at $26) if it falls to $25, but wants at least $24... S 100 ABC @25 stop limit 24 When the stock price hits 25, the limit order is triggered. If the price stays above $24, it will be executed.
All or None Order (AON)
An order that instructs the floor broker to execute an entire order in one transaction; if the order cannot be executed in its entirety, it is allowed to expire. They do not have to be filled immediately like FOK orders. They can be day or GTC orders.
Buy Stop Order
An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.
Sell Stop Order
An order to sell a security that is entered at a price below the current market price and that Is triggered when the market price touches or goes through the sell stop price. Protects a profit or limits a loss in a long stock position
Approval for Day Trading Accounts
Before opening an account, the member must: -provide the customer with a risk disclosure statement that outlines all of the risks associated with day trading (the statement can be furnished in writing or electronically); and -approve the account for a day trading strategy or receive from the customer a written statement that the customer does not intend to engage in day trading.
Reducing Orders when a stock goes ex-dividend
Buy Limit, Sell Stops, and Sell Stop Limit orders are all reduced by the dividend amount on the ex-date after being entered below the market. The stock price opens lower by the amount of the distribution and without this reduction, trading at the lower price on the ex-date could cause an inadvertent execution. Example: ABC closes at 35. The following day is the ex-date for a $0.31 cash dividend. ABC stock should open at 34.69. Without the reduction, a sell stop order at 35 could be triggered even though the lower price is not due to market forces.
SMA
Buying Power A line of credit that a customer can borrow from or use to purchase securities when there is EE in the account.
A customer has a short margin account. In it, there is one stock currently trading at $10 per share. The minimum maintenance requirement for this account is: A) 100% B) 30% C) $5/share D) $2.50/share
C) $5/share
Equity of Short Sales
CR - SMV = EQ **CR does not change with rise or fall of stock price.`
Initial Requirements
Customers are required to deposit a minimum amount of equity for their FIRST PURCHASE in a margin account. Although Regulation T states that a deposit of 50% of the market value of the purchase is required, FINRA rules require that this initial deposit cannot be less than $2,000.00 The customer is required to deposit the greater of the Regulation T requirement or the FINRA minimum. The exception occurs when the customer's initial purchase is less than $2,000; the customer is not required to deposit $2,000, only the full purchase price. *The FINRA minimum rule also applies to short margin accounts. However, because short transactions are more speculative, the minimum of $2,000 is never waived. If a short sale margin requirement is less than $2,000, the required deposit is still $2,000.
Market value at maintenance formula
DR / .75 This determines the market value to which securities can fall before there is a maintenance call
If securities are sold in a restricted account, which of the following are not affected? LMV, DR, EQ, SMA?
EQ
Immediate or Cancel (IOC)
Execute any portion available immediately Cancel any balance remaining
Market-On-Close Orders
Executed at or as near as possible to the closing price in the OTC market. These must be entered before 3:40 PM ET on the NYSE to be executed on the closing price.
At-The-Open
Executed at the opening of the market. Partial executions are allowable
Designated Market Maker DMM)
Facilitate trading in specific stocks. Act as dealers when they execute trades in their own accounts. Act as brokers when they execute orders other members leave with them. Receive rebates on fees charged by the exchange whenever their quotes result in trades.
Test Topic
Failure to mainain an OTC order room or other department assigned to executre customers' orders cannot be considered justification for executing away from the best available market.
Who regulates margin transactions?
Federal Reserve Board
Regulation T
Federal Reserve Board regulation covering the extension of credit to customers by securities brokers, dealers, and members of the national securities exchanges. It establishes INITIAL MARGIN requirements. Customers must deposit 50% of the price of the transaction within 2 additional business days of regular way settlement (S + 2). So 4 total business days. OR can be paid with fully paid marginable securities valued at twice the amount of the Reg T cash call. Also identifies which securities are eligible for purchase on margin and which may be used for collateral for loans for other purchases.
"The Market is 40-41"
Firm Quote
Sell Stop Order Example
I am long 1,000 shares of LMN stock at $32 and the stock is now at $41. I place a sell 1,000 LMN 40 stop order. Once the stock price hits 40, the order becomes a market order to sell 1,000 LMN.
Maintenance Requirement
In a long market account, minimum maintenance is 25% of the LMV. Short Accounts is 30%. When marking to the market, the calculation of Regulation T and minimum maintenance is based on the new LMV
Equity in a Long account
LMV - DR = EQ
Regulation SHO
Mandates a locate requirement for securities to be sold short prior to the short sale
Volatile Market Conditions Rule 80b
Market-wide circuit breaker rules protect against rapid drops in the market (March 2020)
Exchange Listing Requirements
Must have a minimum number of publicly held shares and a minimum number of shareholders, each holding 100 shares or more to be listed on the NYSE.
What else generates SMA?
Nonrequired Cash Deposits Dividends
Street Name
Registered in the name of the firm. The BD is then known as the nominal, or named, owner. The customer is the beneficial owner.
OTC Trader
Responsible for taking customer orders received in the trading department and getting them executed at the best possible price. They may try to negotiate prices.
Credit Registrar (CR)
SMV + EQ
SLoBS BLiSS
Sell Limits and Buy Stops over Buy Limits and Sell Stops SLoBS tells you the orders placed above the current market price. BLiSS refers to orders placed below the current market price
Buy Stop Order Example
Shorted 1,000 shares of ABC at $55. The stock is currently trading at $48, but they want to gain more profit without risking losses. They place a buy stop order at $49. (buy 1,000 ABC 49 stop) Once the stock price hits $49, the order becomes a market order to buy 1,000 ABC.
"It is 40-41 subject"
Subject Quote
"It is around 40-41"
Subject or Workout Quote
Ask
The BDs selling price and what the customer buys at.
Designated Examining Authority (DEA)
The Self-Regulatory Organization (SRO) designated by the SEC as being responsible for determining a particular firm's financial soundness and operating condition for broker-dealers that are members of more than one self regulatory organization. Where a BD applies for an extension for payment.
Backing Away
The failure of a market maker to fulfill its obligation to buy or sell the minimum amount for a bona fide quote. This is a violation of trade rules
Test Topic
The interest paid by margin customers on money borrowed is a variable rate based on the broker call rate.
Shorting Bonds
The municipal market is too thin to short bonds and is almost never done.
Interpositioning
The placing of a third party between a broker-dealer and its customer when filling a trade. This practice is prohibited unless it results in a better execution for the customer.
Arbitrage
The practice of buying and selling equivalent goods to take advantage of a price difference
Firm Quote
The price at which a market maker stands ready to buy or sell at least one trading unit (100 shares or five bonds) at the quoted price with other member firms. All quotes are firm quotes unless otherwise indicated. Example: 52.15 - 52.27, 4 x 6 - The bid is 52.15 and is willing to buy as many as 400 shares at that price, and is willing to sell as many as 600 shares at 52.267.
Bid
The price the BD is willing to pay and what the customer sells at
Freeriding
The prohibited action of a client who buys securities and then sells them without paying for the initial purchase. Account will be frozen for 90 days if no extension is received.
Market Arbitrage
The simultaneous purchase and sale of the same commodity or security on different exchanges to profit from price disparity between the two markets.
Stock Ahead
The situation wherein an investor who has entered an order to buy or sell a stock at a certain price will see transactions at that price reported on the Tape while her own order has not been executed. The reason is that other buy and sell orders at the same price came in to the specialist ahead of her and had priority. This is a reason why your limit order may not be executed.
"it is 40-41" "we are quoting 40 -41"
This phrasing indicates that the quote is actual.
Securities exempt from Regulation T Margin Requirements
US Treasury bills, notes, and bonds Government Agency Issues Muni Securities
Market Order
a request to buy or sell a stock at the current market price The fill is guaranteed, but the price is not. They have priority over all other orders.
good-til-canceled (GTC) order
a stock trade request that stays on the books until completely filled, canceled, or if it is unexecuted on the last business day of April or the last business day of October. (Order must be reentered then)
Day Order
a trading order that expires at the end of the trading day during which it was made
workout quote
an approximate figure used to provide the buyer or seller with an indication of price, not a firm quote Reserved for situations where the mm knows that special handling will be required to accommodate a particular trade. (Order is too big or the market is too thin)
Limit Order
an order to either buy a security at a specified or lower price or to sell a security at or above a specified price. Two Time Frames: 1) Day Order 2) Good Til Canceled
Not Held (NH) Order
customer agrees not to hold the floor broker to a particular time and price of execution. This gives the broker discretion to choose the best time or price. Cannot be placed with the NYSE DMM. These are technically day orders
Long Margin Account
customers purchase securities and pay interest on the money borrowed until the loan is repaid **Money borrowed
SMA is
equal to the greater of the EE or the SMA already in the account (even if the securities decline in value)
Hypothecation Agreement
gives permission to the broker/dealer to pledge customer margin securities as collateral. The firm hypothecates securities to the bank and the bank loans money to the BD on the basis of the loan value of these securities. All securities must be held in street name. The BD rehypothecates them as collateral for a loan from the bank. (max 140% of debit balance)
Loan Consent Form
gives permission to the firm to loan customer margin securities to other customers or broker/dealers, usually for short sales **This is the only optional form
fill or kill order
in order that instructs the floor broker to sell the entire order immediately at the limit price or better. If the entire order cannot be executed immediately, it is canceled.
Pattern Day Trader
one who executes four or more day trades in a five business day period. Minimum equity requirement is $25,000. They must have at least this much in the account equity on any day in which trading occurs. The minimum maintenance margin requirement is 25%. Buying power is 4x the maintenance margin excess, which is defined as the equity in the account above the 25% minimum requirement. Account Guarantees are prohibited. A cross guarantee is one for which another customer, in writing, agrees to the use of money or securities in her account to carry the guaranteed accounts.
Subject Quote
price is tentative, subject to reconfirmation by the market maker "last time I looked, it was 38 to a half" (38-38.50)
Marginable
refers to securities that can be used as collateral in a margin account
Nominal Quote
someone's assessment of where a stock might trade in an active market. Not a Firm Quote. Common with muni bonds.
Short Margin Account
stock is borrowed and then sold short, enabling the customer to profit if its value declines **Stock borrowed
Excess Equity
the amount of equity exceeding the Regulation T requirement
Margin
the amount of equity that must be depsoited to buy securities in a margin account
Debit Register (DR)
the amount of money borrowed by the customer
Long market value (LMV)
the current market value of the stock position the investor purchased
Equity (EQ)
the customer's net worth in the margin account; it represents the portion of the securities the customer fully owns
Marking to the Market
the practice of recalculation to check the status of the equity in the account
Short Sale
the sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan. Bearish Attitude.
