Chapter 8

Orders that are reduced on the Ex-Dividend date are:

Orders that are placed below market price and are either: 1. Buy Limits 2. Sell Stops 3. Sell Stop Limits

Sell orders sent to an exchange must be marked:

Every sell order must be marked as either a long sale or a short sale.

The Specialist (DMM)

1. Act as an agent: execute orders that other brokers leave with them. 2. Act as a principal: They buy and sell in their own accounts and are expected to maintain fair and orderly markets.

Broker

1. Acts as an agent, transacts orders on the clients behalf 2. charges a commission 3. is not a market maker 4. must disclose role and commission amount

Dealer

1. Acts as principal, own risk, own account 2. Charges markup or markdown 3. May make markets and take positions 4. Disclose role and disclose markup and markdown if a Nasdaq security

The Secondary Market (where securities are bought and sold). All security transactions take place in one of four trading markets:

1. The Exchange Market (auction market): composed of the NYSE and other exchanges on which listed securities are traded. 2. OTC Market (second market): Where securities that are not listed on the exchanges trade. Composed of the Nasdaq and non-Nasdaq. Trades made via computer. 3. Third Market (Nasdaq Intermarket)- where securities that are listed on exchanges are traded in the OTC Market. 4. Fourth Market: a market for institutional investors in which large blocks of stock, both listed and unlisted, unassisted by dealers. Trades are via ECN.

A dealer can fill a customer order in three ways:

1. The dealer is a market maker in the security, it will buy from or sell to the customer, charging a mark up or mark down 2. The firm is not a market maker, it can fill the order as agent, and charge a commission for its execution services 3. An order can be filled as a risk-less and simultaneous transaction.

A person is long a security if he:

1. has title to it 2. has purchased security but has not received it yet If hasn't met these conditions it's considered a short sale

Quote

A dealers current bid and offer on a security

Making Markets

A principal activity. The broker/dealer stands ready, willing, and able to buy or sell securities for its own account. A dealer acts as a principal when it owns the securities it trades. When the broker/dealer is not acting for its own account, it acts as a broker or an agent.

Markup Policy

Adopted to ensure that the investing public receives fair treatment and pays reasonable rates for brokerage service

Brokers

Agents that arrange trades for clients and charge commissions. They do not effect trades but arrange them between buyers and sellers.

All of the following events would cause FINRA to terminate quotations in a SmallCap stock EXCEPT

Although 3 market makers are required initially for an issue to be included on Nasdaq, only 2 market makers are needed to continue being quoted on the system. The other answers, bankruptcy, a disclaimer opinion being rendered by auditors, or any reason FINRA deems termination to be in the general publics interest, are sufficient reason for termination of quotations.

Order Audit Trail System (OATS)

Automated computer system created to record information relating to orders, quotes, and other trade info. (NASDAQ)

Dark pools of liquidity

Dark pools, sometimes referred to as dark pools of liquidity, is trading volume that occurs or liquidity that is not openly available to the public. The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets and is not visible to the public. This diminishes market transparency for public retail customers.

What is part of Nasdaq

Equity Market 1. common stock 2. preferred stock 3. warrants 4. limited partnerships 5. ADRs 6. convertible bonds

Current Bid

Highest price at which the dealer will buy

In a proceeds transaction for a customer where the proceeds from the liquidation of one stock are used to purchase another stock, the 5% markup policy is computed on the basis of:

In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.

A client asks his broker to enter a day order to buy 100 shares of COW at 36. Later in the day, he changes the order to a GTC order at the same price and for the same number of shares. What happens to the position of the order on the order book?

It loses its original position.

Super Display Book

It's where nearly 75% of orders are received and processes. Dealers use this computerized order routing system to route an order directly to the appropriate equity post.

Market Wide Circuit Breaker Rules

Level 1 Halt = 7% decline in the S&P 500 (before 3:25 pm - 15 min) Level 2 Halt = 13% decline in the S&P 500 (before 3:25 pm - 15 min) Level 3 Halt = 20% decline in the S&P 500 (any time, trading will not resume for the rest of the day)

Current Offer

Lowest price at which the dealer will sell

Backing Away

Market Maker that refuses to do business at the price quoted

A customer has entered an option order with your broker/dealer. At which of the following locations could such an order be executed?

Options orders can be executed on the NYSE/AMEX, the CBOE, and the Nasdaq OMX PHLX, which offers a hybrid of electronic and on-floor execution availability.

Messages that may appear on the Tape

SLD: The exchange did not report a sale on time OPD: Opening transaction has been delayed Halt: The trading of a security has been halted

Nominal Quote

Someone's assessment of where a stock might trade in a active market.

Stop Orders

Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price.

The Nasdaq market includes securities in the:

The Nasdaq Market includes securities in 3 market tiers; global select, global, and capital markets. Bulletin Board securities (OTCBB) are issues that are not listed on Nasdaq or any U.S. exchange. OTC Pink issues are unlisted and, like Bulletin Board stocks, are referred to as non-Nasdaq.

NASDAQ OMX PHLX

The OMX PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on floor.

National Association of Securities Dealers Automated Quotation (NASDAQ)

The computerized information system that tracks OTC equities trading

A day order is entered to buy 500 LMN at 24.35. By the close of the trading day the firm has been able to purchase 100 shares at 24.25 and 200 shares at 24.35. If the remainder of the order is unfilled, what is the outcome?

The customer must accept the order for 300 shares. The representative cannot guarantee that the order will be filled by the end of day.

Spread

The difference between the Bid and the Ask

The Sec regulation requiring that firms holding customer limit orders not trade through or ahead of those orders is:

The order protection rule, which comes under the broad sweeping regulation NMS (National Market System) mandates that firms holding customer limit orders do not trade through or ahead of those limits with other customer orders or with the firms own proprietary orders.

Which of the following terms are associated with over-the-counter trading?

The over-the-counter market is a negotiated market. Within it, market makers are broker/dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

A customer entered an order to sell short 100 shares of ABC. The stock closed on Friday at 48.00. The stock will trade ex-dividend $.50 on Monday. At what price can the order be executed at the opening?

The stock's price is adjusted for the dividend at its opening the next morning. The adjustment in the stock does not limit where the short sale can be executed.

What does not trade on the NASDAQ?

U.S. government securities.

OTC Pink

With updates made infrequently, quotes found on the electronic OTC Pink are never firm. Quotes on such systems are for informational purposes only; subject to change.

All of the following may be cited to justify a markup on a stock sold from a broker/dealer's inventory

availability. the security's price. overall value of the transaction. not the dealers cost

What does not trade on the OTC?

closed-end investment companies.

Consolidated Tape System

receives, validates, and sequences the last sale price and size of all equity transactions in listed securities.

he following orders could be placed on the specialist (designated market maker) order display book

stop limit orders, stop orders, limit orders. (Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop and limit orders.)

An OTC quote that must be reconfirmed with the OTC trading room before a broker/dealer takes action is:

subject.

A short sale of stock directed to an exchange must observe all of the following

the locate requirement for borrowed shares. a margin requirement of 50%. a minimum maintenance requirement of 30%.

Market Makers

1. Buy and Sell as principals 2. Maintain a fair and orderly market 3. Provide liquidity

4 Types of Traders

1. Commission House Brokers (floor brokers): execute orders for clients and for their firms' accounts 2. Two-Dollar Brokers: When Commission House Brokers are too busy Two-Dollar Brokers will execute trades. They charge commission. 3. Registered Traders: members of the Exchange who trade primarily for their own accounts. 4. Specialists or Designated Market Maker (DMM): Facilitate trading in specific stocks. Chief function is to maintain a fair and orderly market in those stocks. Receive rebates on fees.

Time Sensitive Orders

1. Day Orders: Valid only until the close of trading on the day it is entered. 2. Good till canceled: Valid until cancelled. Orders are automatically cancelled on the last business day of April and last business day of October 3. At the Open and Market on close orders 4. Not Held Orders: the customer agrees not to hold the floor broker to a particular time and price of execution. May no be placed with a specialist. 5. Fill or Kill Order: Fill entire order immediately at limit price or better. If it can't be filled immediately it's canceled. 6. Immediate or Cancel: Similar to FOK but they accept partial execution, the rest is canceled. 7. All or None: Similar to FOK, different because they don't have to be filled immediately (GTC). 8. One Cancels the Other 9. Do Not Ship: If order requires routing to another market it will be cancelled immediately by the NYSE.

Delisting from NYSE

1. Failure to meet min maintenance requirements 2. Low share price, volume. 3. not deemed to be in public interest 4. bankruptcy

3 Ways a Dealer can fill an order

1. Find a seller of the security and arrange a trade. 2. Buy the security from a market maker, mark up the price, and then resell them to the client. 3. Sell the shares to the client from his own inventory

What influences the spread?

1. Issue's size 2. Issuer's financial situation 3. Amount of market activity in the issue 4. Market conditions

Types of Orders

1. Market: Executed immediately at the market price 2. Limit: Limits the amount paid or received for securities 3. Stop: becomes a market order if the stock reaches or goes through the stop price 4. Stop Limit: entered as a stop order and changed to a limit order if the stock hits or goes through the stop price.

The Specialist awards the trade in the following order:

1. Priority: first order in 2. Precedence: largest order of those submitted 3. Parity: random drawing

In assessing the fairness of the commission or mark up price they consider the following factors:

1. Type of Security 2. Inactively Traded Stocks 3. Selling Price of Security: Mark up and commission rates should decrease as stock price increases 4. Dollar Amount of Transaction: Smaller dollar amount = higher markups 5. Nature of the Dealer's Business: 6. Pattern of Markups: 7. Markups on Inactive Stocks: where no market quotes are available, may base markup on cost in stock

Consider the following Nasdaq system quotes: Bid Offer Market Maker 1: 14.75 - 15.15 Market Maker 2: 15 - 15.50 Market Maker 3: 14.85 - 15.50 The inside market is:

15 - 15.15. The inside market is the highest bid and the lowest offer available.

A member receives an order to buy non-Nasdaq OTC securities and sees no published quotes. To determine the prevailing market, the member must contact a minimum of:

3 dealers

What does 11-11.5 3x5 mean?

A firm quote between dealers for 300 shares at the bid of 11 and 500 shares at the asked of 11.5

FINRA's Trade Reporting Facility (TRF)

An automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

Inside Market

Best bid (highest price) which stock can be sold and the best ask (lowest) at which the stock can be bought

Your broker/dealer has just negotiated a trade with another broker/dealer in a Nasdaq-listed stock. The automated system that will facilitate the reporting of the post-execution data electronically, such as price and volume, to FINRA is known as

Broker/dealers acting in a dealer capacity (negotiating transactions with other broker dealers) in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor will have the post-execution data such as price and volume transmitted electronically to FINRA via the Trade Reporting Facility (TRF).

FINRA can initiate a trading halt for all of the following

Bulletin Board stocks, NASDAQ, listed stocks trading OTC. (Only the exchange or the SEC can initiate a trading halt for a listed security trading on an exchange floor.)

Dealers

Buy and sell securities for their own accounts, called position trading. Dealers charge markups rather than commission.

If a Nasdaq market maker is selling stock to a customer from inventory and the firm has held the shares to be sold for several months, what price should the dealer use as a basis for a markup?

FINRA rules require that a dealer's markup to a customer be based on the current market rather than the dealer's cost in an active, competitive market. The dealer's potential loss on inventory is considered to be a risk of making a market.

Which of the following market maker practices is strictly prohibited under FINRA rules?

FINRA rules strictly prohibit delaying the reporting of a trade at the customer's request. A customer may make a no-display request, in which case the limit order need not be displayed. A markup of more than 5% is allowed if it can be justified. Paying another broker/dealer to direct trades is not prohibited if the practice is disclosed to the customer (payment for order flow).

A customer has an order to buy 400 ABC at 60 Stop. ABC declares a 25% stock dividend. On the ex-date, the order on the order book will read:

For stock dividends, all orders on the book are adjusted and the order value must be the same before and after the adjustment. Before the adjustment 400 ABC at 60 Stop = $24,000 total value. After the adjustment total shares on the buy order will be 500 (400 × 25% = 100 new shares, 400 + 100 = 500). To arrive at the new STOP price divide the total order value by the new number of shares ($24,000 / 500 shares = 48). After the adjustment the new order will read; buy 500 shares at 48 stop.

Regulation SHO

Mandates a locate requirement: before the short sale of any equity, firms must locate the equity to ensure delivery will be made. Not doing so is naked short selling and is prohibited.

NASDAQ Market Maker Requirements

Must report: 1. Nasdaq symbol 2. Number of Shares 3. Transaction Price 4. Whether buy, sell or cross 5. Market Maker transactions must be reported within 30 seconds of trade's execution 6. Registered Market Maker's must report daily, their total volume in securities in which they are Market Makers.

Stocks that are listed on the NYSE can also be listed on

NYSE-listed securities can be listed on and trade on other U.S. exchanges. Listed securities can also be traded in the OTC market and when they do, are known to be trading in the third market. Nasdaq is for unlisted securities, whereas the CBOE trades listed options, not stock.

Priority and precedence rules of bids and offers manage trading activity on the:

NYSE.

Which of the following describes Nasdaq Level 3 service?

Nasdaq Level 3 service allows market makers to enter and update quotations on securities in which the market makers are registered with FINRA.

The Tape reports are distributed over two networks, they are:

Network A: reports transactions in NYSE listed securities wherever they are traded. Network B: represents last sales for securities that are listed on the NYSE, securities eligible for the NYSE listing but not traded solely by Regional Exchanges, Local Issues, and Bonds.

OTC vs. NYSE

OTC 1. Securities prices determined through negotiation 2. Regulated by FINRA 3. Market Makers must register with both the SEC and FINRA 4. Traded at many locations across the country NYSE 1. Securities prices determined through auction bidding 2. Regulated by FINRA 3. Market Makers must register with the SEC and be Exchange Members 4. Traded only on the NYSE floor

What type of orders on the order book would be reduced for a cash dividend on the ex-date?

Orders on the book adjusted on the ex-date for a cash dividend are those below the current market: buy limits and sell stops. The buy limit at 50 is marked DNR (do not reduce) so the only order reduced is the sell stop at 50.

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following?

Plus tick. Zero-plus tick. Minus tick. Zero-minus tick. (at any time during the trade sequence)

Firm Quotation

Price at which the market maker stands ready to buy or sell at least one trading unit

Subject Quote

Price is tentative, subject to reconfirmation by the market maker.

The Consolidated Tape System (CTS)

Receives and validates the last sale price and size of listed equity securities transactions on the NYSE and other regional exchanges and FINRA. Options transactions are not reported to the CTS.

The 5% markup policy applies to:

The 5% markup policy applies to agency and principal nonexempt securities and transactions both exchange and OTC traded. It does not apply to prospectus offerings (mutual funds and new issues).

All of the following are subject to the 5% markup policy

The 5% markup policy applies to markups, markdowns, and commissions. New offerings sold by prospectus are exempt from this rule.

All of the following statements regarding a market not-held order are true:

the order ticket must be marked not held. it may be filled a small portion at a time. it gives the floor broker discretion over the price or time of execution