Chapter 18: Trading Securities
Limit Orders: - Buy Limit - Sell Limit
Execution only at a specified price or better - Buy Limit: Execution at specified price or below - Sell Limit: Execution at specified price or Above
Short Equity Position
Credit Balance - CMV Short
B/D acts in the capacity of a Broker
- Agency Capacity - Charge Commission
New York Stock Exchange (NYSE)
- Price determined through Auction - Regulated by NYSE - Trade on the NYSE Floor
Over-the-Counter Market (OTC)
- Prices determined through negotiation - Regulated by FINRA - Trade at many locations around the country
B/D acts in the capacity of a Dealer
- Principal Capacity - Charge Mark up/Mark down
Spread
Difference between the bid and ask prices
Mixed Margin Account
A margin account that contains both long and short stock positions
Block Trade
At least 10k shares or $200k
Credit (Margin) Agreement
Authorizes the broker-dealer to use the value of the securities in the account as collateral for the margin loan to the client - The loan from the BD to the client - Written agreement between the client and the broker-dealer evidencing the loan
High Frequency Trading (HFT)
Autonomous computerized trading that seeks quick profits from using high-speed connections to financial exchanges - Takes advantage of the minute discrepancies in price and trade on them quickly and in huge quantities - Firms do not openly disclose their trading activities
Benefits and Negatives of HFT
Benefits: - Increased liquidity in the markets - Market efficiency - Reduced costs Negatives: - Market manipulation - Hurts small investors - Snowballing effect
Long Equity Formula
CMV Long - Debit Balance
Loan Consent Agreement
Gives the firm permission to lend securities held in the margin account to other brokers, usually for short sales - Not mandatory for customers to sign the loan consent agreement
Current Bid
Highest Price at which the dealer will buy
Dark Pools
Is trading volumes that occurs or liquidity that is not openly available to the public - Institutional investors most likely use these
Current Offer
Lowest Price at which the dealer will sell
Specialist
Maintain fair and orderly markets - Fills limit and market orders for the public and trades for his own account to either stabilize of facilitate trading when imbalance in supply and demand occur Person on the floor of a stock exchange
Can a firm act a Broker and a Dealer in the same Transaction?
No
Hypothecation Agreement
Permits the broker-dealer to pledge the client's margin securities as collateral for a loan that the BD takes out. - The loan from a bank to the BD with the client - Mandatory part of a Margin Agreement
Stock Exchanges
Prices are established in an auction process rather than by direct negotiations between buyer and sellers, as occurs in the over-the-counter (OTC) market (Does NOT buy or sell stocks itself; it simply supplies the facilities for its members to trade)
Stop Limit Order: - Sell Stop Limit - Buy Stop Limit
Stop prices activate the order & becomes a limit order and only may be executed at a specified price or better - Sell Stop Limit: placed Below current market price (long stock) - Buy Stop Limit: place Above the current market price (short stock)
Stop Orders - Sell Stop - Buy Stop
Used to prevent a large loss or protect profits. Must be traded at or through a specified price Sell Stop: placed Below current market Price (long stock) Buy Stop: placed Above the Current market price (short stock)
House Call
When additional funds are required based on the terms of the firm's margin agreement - Set by Reg T
Maintenance Call
When additional funds are required based on the terms of the firm's margin agreement - Set by the SRO
Market Maker
is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market - Trade from their own inventory - OTC Markets
