Unit 22

A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received

$45.97 This is really two orders. The first is to stop at 45. That is, once the stock trades at 45 or lower, enter the order. The second order is a sell, but with a limit of 45.50. So the first time the stock hits 45 (or less) is the trade at 44.97. That triggers the sell limit. The next trade is at 45.28 and that is not acceptable to the limit order at 45.50. Because the limit order is saying, "get me 45.50 or higher," the 45.97 is an acceptable price. U22LO6

Block trade

10,000 shares or more

Order ticket - Required items

Account number Solicited/Unsolicited Long/short sale BD and agent identifier No client name/address, current market price, bond rating Type of order

Brokers

Acting an agency capacity -Calls market maker (dealer/principal) -Purchases/sells at inside market

High Frequency Trading

Algorithmic trading Proprietary trading using high speed systems to monitor and submit large numbers of orders to the markets Computers take advantage of minute discrepancies in price

OTC (unlisted) Markets

Between broker-dealers (not an exchange) Municipal and Treasuries (and corporate securities) Negotiated market

Sell Stop orders

Can protect long position in falling market Investor benefits if stock rises Entered below CMV Becomes a market order when triggered Can accelerate a decline in a falling market -Snowball effect

Buy Stop orders

Can protect short position in rising market Investor benefits if stock falls Entered above CMV Becomes a market order when triggered

Broker (agency capacity) Trading costs

Commissions Disclosed on confirmation the firm represents clients who wish to buy a security by finding a seller, or finding a buyer for those clients with a security to sell. Brokers do not buy shares for inventory

Margin Account Forms

Credit Agreement Hypothecation Agreement -Pledging stock as collateral Consent to Loan Agreement - OPTIONAL -BD holds stock until you pay up the full value -BD is entitled to lend stock out NASAA Policy -Received promptly after first margin trade Risk Disclosure Document -Delivered prior to or at account opening (FINRA)

Confirmations

Disclose capacity of firm (broker or dealer) Disclose if market maker Disclosure of control relationship Sent by completion of trade

Securities that may be purchased on margin/used as collateral:

Exchange-listed stocks and bonds Stocks traded on the Nasdaq Stock Market Warrants traded on either of these government and municipal securities

Market orders

Executed immediately at best available price Always executed

Market makers (dealers)

Firm Quote -broker-dealers who stand ready to buy and sell at least the minimum trading unit, usually 100 shares (or any larger amount they have indicated), in each stock in which they have published bid and ask quotes Dealer Capacity -sell from their inventory at their asking price and -buy for their inventory at the bid price. Provides liquidity No compensation from issuer

Benefits of HFT

Increased liquidity, especially very active stocks Arbitrage increases market efficiency Lower costs for institutional purchasers

Mixed Margin Account

Long and short positions Combined equity of positions Equity = Long CMV + short credit balance - long debit balance - short CMV

Dealer (principal capacity) Trading Costs

Mark up or mark down Thinly traded - wider spread

Short orders

Must be in a short margin account Selling short is bearish strategy Deliver stock borrowed from the broker-dealer Return borrowed stock to close out (cover) position -Purchase at lower price = profit -Purchase at higher price = loss (potentially unlimited)

Securities that cannot be purchased on margin, but may be used as margin collateral once owned at least 30 days:

Mutual funds New issues

Securities that cannot be purchased on margin/used as collateral

Options (puts and calls). -LEAPS are an exception, but that is unlikely to be tested Stock rights (preemptive) Insurance contracts -e.g., variable annuities and variable life

Cash Account

Payment in full (no borrowing) within a specified time Retirement and custodial accounts may only be cash

Negatives of HFT

Phony trades can lead to market manipulation It's unfair to small investors who don't have such quick access to information Snowballing effect

Listed Exchanges

Physical location Auction market must be registered with the Securities Exchange Commission as called for in the Securities Exchange Act of 1934

Extension of Margin Credit Computation

Reg T: 50% initial margin requirement SRO Rule: Maintenance margin is a call for additional funds when equity in the account becomes deficient -House maintenance: higher requirement -SRO = 25% for long positions

Marginable Securities

Securities are used as collateral for loan Drop in market value could lead to maintenance call for more money -House call then SRO requirement

SLoBS over BLiSS

Sell Limits and Buy Stops are always above CMV Buy Limits and Sell Stops are always below CMV

Limit orders

Stated prices at which customers are willing to buy or sell Guaranteed price, not fill Buy limit order -Entered below CMV Sell limit order -Entered above CMV Time priority applies -Whoever placed order first If any part of an order can be filled at the limit price, it is done.

Margin interest

Tax deductible

The spread

The difference between the bid and ask

Positive/Negative Margin Computation

Transaction earned more less than interest cost

Dark pools

Used by institutional traders Execute large block trades without impact to public quotes or prices Fund managers use to keep from revealing strategies Market transparency

Margin Account

Uses Leverage -Allows an investor to use some cash and some credit to purchase securities FRB regulates the extension of credit in the securities -Reg T Customer puts of 50% of investment by settlement date -BD lends other 50%

Firm quote

a market maker's current bid and offer on a security.

A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of

a principal trade The market maker is acting in a principal (dealer) capacity. U22LO4

Pegging

any activity intended to keep the price of a stock from moving.

One of the primary differences between trading on listed exchanges and trading in the over-the-counter market is that only on the exchanges are prices determined

by an auction process. One of the chief characteristics of exchange markets is the auction process for determining the price of a security. In the OTC markets, prices are determined by negotiation. The stock exchanges do not set the price, and although FINRA's markup policy is used to determine the charges to customers, that is separate from determining the security's price. U22LO3

Specialist / Designated market maker (DMM)

fills limit and market orders for the public and trades for his own account to either stabilize or facilitate trading when imbalances in supply and demand occur. chief function is to maintain a fair and orderly market in the stocks for which he is responsible. Listed exchanges

The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is

maintenance margin The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply. U22LO2

Supporting

purchase orders are entered in an attempt to keep the price of a stock from falling when one has a long position.

Actions SEC can take against a listed exchange

suspend trading in any nonexempt security for up to 10 days without prior notice; and suspend trading on an entire exchange for up to 90 days -(to do this, the SEC must give prior notification to the President of the United States).

Capping

the act of entering sell orders in a stock for the purpose of keeping the stock from rising above the sale price when one is short the stock.

Current bid

the highest price at which the dealer will buy

Margin Call

the initial call for funds when making a margin transaction

broker call loan rate

the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. slightly higher than other short-term rates Broker call loans are callable on 24-hour notice

Current offer

the lowest price at which the dealer will sell.