Series 55 STC continued
Market Pegged Orders
A market maker peg order can assist a market maker in meeting its quoting obligations although a market maker is not required to use this functionality. It may be placed with an offset that reprices the order as the market moves tick-by-tick. If the market maker does not set an offset, then the system will automatically set the market maker peg order at the designated percentage (on most stocks 8%) away from the NBBO. It can be placed only as a limit order and upon execution the system will not automatically re-enter an order. The market maker must submit a new order to maintain its quote.
Large orders, including those from retail customers
-These are defined as orders for 10,000 shares or more, unless such orders are less than $100,000 in value
Block Size Order
10,000 shares OR have a value of at least $200,000 -- are exceptions to the Customer Limit Order Display Rule
Give-up Agreement
A member may, by agreement, permit another member to report and lock in trades on its behalf. This arrangement requires written documentation and is commonly known as a give-up agreement. Both firms may still be held responsible if the trade is not properly reported.
Threshold Security
A threshold security is any equity security that is registered in accordance with Section 12 of the Securities Exchange Act of 1934 or for which the issuer must file reports in accordance with Section 15(d) of the Act and: There is an aggregate fail to deliver position for 5 CONSECUTIVE SETTLEMENT DAYS at a clearing firm for 10,000 shares or more and equal to at least .5% of the total outstanding shares of the issuer A self-regulatory organization has included the security on a threshold securities list sent to its members
The inside market for a Nasdaq stock is currently 30 - 30.55. MM #8 is holding a nondisplayed customer limit order to sell 500 shares at 30.40. MM #8 receives a market order from broker-dealer A to buy 500 shares. Broker-dealer A has no relationship with MM #8. What is MM #8's obligation? A. Execute the market order and the limit order at 30.55 B. Execute the market order at 30.55 and the limit order at 30.45 C. Execute the market order at 30.55 and the limit order at 30.46 D. Execute the market order and the limit order at 30
A. Absent a relationship or understanding with broker-dealer A, MM #8 does not owe a best execution obligation to the noncustomer and the market order could be executed at 30.55 against A's account. However, this would trigger a Manning obligation to execute the nondisplayed limit order at the same price or better than the market maker received in its own account.
Which of the following statements is TRUE regarding an order for a non-exchange-listed security that is not quoted in a real-time, interdealer quotation system? A. The ticket must indicate names and quotes from at least three market makers, or all market makers if fewer than three B. The order must be approved by a principal prior to execution C. The customer must receive a prospectus at or before the completion of the trade D. The broker-dealer must disclose to the customer the current quotation for the security
A. A broker-dealer executing an order for a non-exchange-listed security generally must indicate on the order ticket names and quotes from at least three market makers. If there are fewer than three market makers in the security, the names and quotes of all market makers must be indicated. Choice (d) is required only for penny stocks. Not all non-exchange-listed stocks are penny stocks. However, if there are two or more priced indications displayed in a real-time, interdealer quotation system, the broker-dealer is not required to check for three quotes. In addition, the order ticket need not be annotated if historical information from the system is available to FINRA.
A market maker is quoting a Nasdaq stock at 28.25 - 28.50, 10 x 50, when the inside market is 28.30 - 28.40, 10 x 10. The market maker then receives two customer limit orders, one to buy 400 shares at 28.25, the other to sell 500 shares at 28.50. What is the market maker's quote after receiving the orders and treating them according to the SEC Display Rule? A.28.25 - 28.50, 10 x 50 B. 28.25 - 28.50, 14 x 50 C. 28.25 - 28.50, 10 x 55 D. 28.25 - 28.50, 14 x 55
A. If a market maker is at the inside market and accepts a customer limit order at the inside, it must change its size to reflect the customer's interest, unless the order is de minimis (10% or less of the market maker's size). In this case, however, neither side of the market maker's quote is at the inside. Therefore, the size of the customer's order need not be reflected by the market maker.
Limit orders entered after 9:28 a.m. ET that would lock or cross the market in the Nasdaq Market Center Execution System are: I. Treated as opening imbalance only (OIO) orders II. Returned to the sending market participant III. Cancelled IV. Adjusted to the inside market A. I and II only B. I and IV only C. II and III only D. III and IV only
B. Although market on open (MOO) and limit on open (LOO) orders cannot be entered after 9:28 a.m., OIO orders and normal market hours limit orders can be entered after 9:28 a.m. Limit orders entered after 9:28 a.m. that are intended for normal market hours trading are treated like opening imbalance only (OIO) orders and are eligible to participate in the opening cross. OIO (and therefore normal market hours limit orders) add liquidity to the opening cross and offset any market on open (MOO) and limit on open (LOO) orders during the opening cross, which takes place at 9:30 a.m. ET. Any OIO orders or normal market hours limit orders entered during this time that are more aggressively priced will be adjusted to the inside market.
A market maker is quoting a security on the OTCBB. The minimum quote size is 200 shares and the market maker is quoting 12.23 - 12.30, 8 x 5. The market maker is obligated to: A. Purchase a minimum of 200 shares at 12.23 B. Sell a minimum of 200 shares at 12.30 C. Purchase a minimum of 800 shares at 12.23 D. Sell a maximum of 500 shares at 12.30
D. FINRA rules require that if a member gives a priced bid or offer, the member must be prepared to honor it at the price and under the conditions stated. This is FINRA's version of the Firm Quote Rule. Failure to purchase or sell priced quotes is considered a backing-away violation. Since the market maker is quoting 12.23 - 12.30, 8 x 5, the market maker is obligated to purchase a minimum of 800 shares at 12.23 and sell a minimum of 500 shares at 12.30. The market maker may purchase or sell at these prices at quantities above their quoted size. The minimum quote size of 200 shares is based on the price of the security ($10.01 - $100.00) and market makers are permitted to have large size quotes.
Under Rule 10b-18, a broker-dealer is purchasing stock for an issuer. Is the firm allowed to purchase the stock in a principal transaction and then resell the security to the issuer? A. No, the broker-dealer may act only in an agency capacity B. Yes, provided the broker-dealer may is a bona fide market maker in the security prior to receiving the order from the issuer C. Yes, provided the broker-dealer discloses this possibility to the issuer prior to executing the transaction D. Yes, but only if it is a riskless principal transaction
D. The safe harbor provision of Rule 10b-18 is available for agency and riskless principal transactions. A riskless principal transaction is defined as a trade in which a firm, after receiving an order from an issuer to buy its security, buys the security at the same price to effect the issuer's order. In order words, both legs of the transaction must be effected at the same price with the broker-dealer then charging a commission, markup, or commission equivalent.
MM#1 is offering 500 shares of a Nasdaq stock at 31.55 when the inside market is 31.50 - 31.55, 10 x 5. MM#2 contacts MM#1 with a proposal to buy 700 shares at 31.55. Which of the following statements is TRUE regarding MM#1's response? A. MM#1 may refuse to execute MM#2's order, since it exceeds MM#1's quote size. MM#1 has no further obligation B. MM#1 must execute at least 500 shares of MM#2's order, but then has no further obligation C.If MM#1 executes MM#2's entire order, it must move its offer up D. If MM#1 executes MM#2's entire order, it need not move its quote
D. Under the SEC's Firm Quote Rule, MM#1 is only obligated to sell 500 shares to MM#2 at 31.55. However, if MM#1 fails to execute the full size of MM#2's order, MM#1 must move its offer up under the industry's Trade-or-Fade rule. This rule applies when the incoming order is at least 100 shares (one normal unit of trading) larger than the quoting market maker's published size.
Confirmations for transactions that are executed under payment-for-order-flow arrangements must disclose this practice and offer to provide additional information upon request. In addition, a broker-dealer must provide written information about its payment-for-order-flow practices at the time a new account is opened, and annually thereafter
Example: MM#1 pays 1 cent per share to selected broker-dealers for their retail customer orders in Nasdaq stocks sent to MM#1 for execution
Erroneous Trades
FINRA defines the term clearly erroneous to refer to when there is an obvious error in any term, such as price, number or shares, or other unit of trading, or the identification of the security. A FINRA officer or Nasdaq official has the authority to declare a transaction null and void. The officer will generally take action within 30 minutes after becoming aware of a transaction in an exchange-listed security. In the case on an OTC equity security, the officer will take action as soon as possible, but in all cases by 3:00 p.m. on the next trading day. FINRA may also expand (not lower) the numerical guidelines applicable to transactions that occur between 9:30 a.m. and 10:00 a.m. ET when there is a volatile market opening. If S&P Futures are up or down 3%, the guidelines are doubled and if S&P Futures are up or down by 5%, they are tripled.
NASDAQ Delisting
If an issue is delisted from Nasdaq, the issuer must reapply and satisfy initial listing requirements in order to be relisted on Nasdaq. An issue that is delisted from Nasdaq may trade on the OTCBB or the Pink Sheets. The financial reporting requirements of the Securities Exchange Act of 1934 are, in part, based on an issuer's level of assets and shareholders.
Larger Traders who must Form 13H
Large traders must file Form 13H, obtain a unique identification number, and provide this number to the broker-dealers that they trade through. The SEC requires the registration of large traders, defined as persons who exercise investment discretion in exchange-listed (NMS) equities or options, and the activity is: During the day, either two million shares or a market value of $20MM or During the month, either twenty million shares or shares with a market value of $200MM Since the firm in choice (c) traded 15 million, not 20 million shares, it is not defined as a large trader.
Exemptions to trade through rule
Material delays caused by malfunctioning equipment, also known as the "self-help" exemption Flickering quotations that occur as a result of rapidly changing quotations Benchmark orders such as volume weighted average price (VWAP) orders Stopped orders Transactions that occur at a single price at the market open, close or reopening after a halt
Considered "Short"
SEC and Nasdaq rules on short sales incorporate the SEC definition of a short sale -- any sale of a security that the seller does not own, or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. The definition goes on to state that a person who owns an option, right, warrant, or convertible and has exercised or tendered that security is considered long the underlying stock even if it has not yet been received. A person is also long only to the extent she has a net-long position.
Passive Market Making is for NASDAQ stocks
The true statements are that a passive market maker's displayed size may not exceed its daily purchase limit and that the prospectus for the offering must describe passive market making and disclose that, if necessary, the underwriters and selling group members intend to engage in this activity. Passive market making is permitted by any underwriter or selling group member that is a registered market maker in a Nasdaq security, but is NOT permitted for other NMS stocks (e.g., an NYSE-listed security).
Opening Cross
When orders are processed for the opening cross they are entered in time priority. The opening cross takes place at 9:30 a.m. and all orders participating in the cross are executed at a single opening price. When the Nasdaq opening cross price has been established and less than all of the MOO, LOO, OIO, and early market hours orders can be filled, orders are executed in priority of type, followed by priority of time, as specified in Nasdaq Rule 4752. Any orders not eligible for the opening cross participate in the market as per their original order specifications
