Unit 2 Section 8

Carrying Firms (clearing firms)

A carrying firm carries customer accounts and accepts funds and securities from customers. They have the capability to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements. Carrying firms must segregate (hold separately) customer funds and securities held in their custody from the firm's capital and securities.

Trustee

A trustee is a fiduciary that oversees a trust.

Investment Advisor

Anyone who gives investment advice as a regular part of their business for compensation. They must register as an investment adviser (IA) under the Investment Adviser Act of 1940. Investment advisors (IA) offer advice as a fiduciary. Agents of investment advisors need to register and pass the series 65 or series 66 exam (for reps with series 7). A RR who is registered under the Securities Exchange Act of 1934 and has been charging commissions for transactions who now wants to charge separately for investment advice, regardless of whether a transaction takes place or not will need to register under the Advisers Act of 1940 by passing the series 65 or 66. This fiduciary standard mandates that an RIA must always unconditionally put the client's best interests ahead of his or her own, regardless of all other circumstances. RIAs are also required to disclose any possible conflicts of interest to their clients and act in an ethical manner in all of their business dealings. Some RIAs charge clients a percentage of their assets under management while others charge either an hourly or a flat fee to dispense advice.

Floor broker

Floor brokers represent their firms and their firm's clients on the floor. If your customer places a trade that will execute on an exchange, a floor broker will handle it.

Registered Representative (RR)

Registered representatives can buy and sell securities for clients. They are primarily known as transaction-based service providers. To carry out these transactions a registered representative must be licensed to sell the designated securities. They must also be sponsored by a firm registered with the Financial Industry Regulatory Authority (FINRA).

Size (in 100s)

Represents the number of shares available. 20x14 means 2000 up for bid 1400 up for ask.

Retail Investors

Retail investors are the normal people who are investing their own money to accomplish their own objectives.

Broker-Dealers who provide Advice for a fee

are subject to registration under the Investment Adviser Act of 1940.

NYSE trading hours

9:30 am to 4:00 pm ET OTC Markets have same trading times

Depositories and clearing corporations

A clearing agency is an intermediary between the buy and sell sides if a transaction. The clearing agency receives and delivers payments and securities on behalf of both parties. Any organization that fulfills this function is considered a clearing agency including BDs and commercial banks. The Depository Trust & Clearing Corporation (DTCC) is the world's largest securities depository (services for all securities except restricted securities or subject to transfer or ownership restrictions). The DTCC is a member of the Federal Reserve System and is not in the retail banking business.

Fully disclosed (introducing) firms

A fully disclosed firm or introducing BD, is one that introduces its customers to a clearing firm. The clearing firm holds the funds and securities of the introducing firm's customers and performs related functions, such as sending confirmations and statements for its correspondent firms. Acts as a firm's back-office. Less risk associated with this since they do not hold the assets and capital requirements are lowered. Introducing firms have the ability to execute trades for its customers but the settlement (clearing) of the trade falls to the carrying firm.

Prime Brokers

A prime account allows customers-generally an institution-to select one member firm (the prime broker) to provide custody and other services, while the other firms- called the executing brokers-handle all trades placed by the customer. To open an account, a member (prime broker) must sign an agreement with the customer, spelling out the terms of the agreement, as well as names of all executing brokers the customer has contracted with. The customer receives trade confirms and account statements from the prime broker, who facilitates the clearance and settlement of the security transactions. Responsibility for compliance of certain trading rules rests with the executing brokers. They key advantage is that it provides clients with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client's cash and securities. An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities, as well as other back-office functions, while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders

IAs who are also BDs

An advisor has "switched hats" from IA to BD when they offer advice then go an place trades and this person will be "dual-registered" (page 148)

Institutional Investor

An institutional investor is a large investor such as a mutual fund, a pension fund, a bank, an insurance company, or some other financial service organization.

OTC Market

An interdealer computer and telephone network where market makers in stocks show the bid and ask price for stocks in which they make a market.

Broker-dealers

Broker-dealers (FINRA member firms) perform securities transactions for their own accounts or for their customers. Their primary source of revenue is from transaction fees like commissions and loads. Each member firm BD operates under an individualized membership agreement with FINRA and possibly with other self-regulatory organizations (SROs). Once becoming a member, firms and their associated persons my never state that they are endorsed, approved, or recommended by a regulator. This is both written and verbal. Some firms will publish quotes to buy and sell securities and are known as market makers. A broker-dealer may act as a broker or a dealer on a transaction, but may never be both on the same transaction.

Fiduciaries: custodians and trustees

Certain types of accounts are managed by a custodian or trustee, both are fiduciaries. A fiduciary is a person that manages assets for another person, a beneficiary. Best interest fiduciary. An investment adviser is always a fiduciary. Not all fiduciaries are professionals.

Employees

Employees of an exchange support its members, but are not involved in trading.

Facilitators

Facilitators help customers in performing transactions in the secondary market.

Day Trader

Generally a type of retail investor that trades rapidly in and out of positions. Most will close the day "flat" (no open positions).

Two-dollar broker

If the floor brokers become overwhelmed by trades, they enlist the services of the $2 brokers. Place trades for the floor brokers and charge a $2 fee for their services.

Investors

Investors are the persons (can be companies) who are buying and selling securities in the secondary markets.

The over-the-counter market (OTC)

OTC markets also have criteria that a company must meet to be traded on a particular OTC venue. There is no central marketplace facilities for trading. Trading takes place over the phone, over computer networks, and in trading rooms across the country. The OTC market works through an interdealer network and registered market makers compete among themselves to post the best bid and ask prices. The OTC market is a negotiated market. Tens of thousands of small and micro-capitalization companies are traded over-the-counter around the world. A market maker is a broker dealer that maintains an inventory in a given security but in the OTC there are multiple market makers for the same security. When a customer places an order with a broker they chooses a market maker to co complete the trade (must choose the best price). Sells at the bid, buys at the ask. Quotes in the OTC market represent the highest bid and the lowest ask.

Custodian

On the exam, a custodian refers to a custodian on a minor's account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA). It may also refer to a firm that holds assets in a qualified retirement account such as an IRA.

Exchanges

Operates as auction markets where stocks listed on the exchange are traded.

Dark pools

Sometimes called dark pools of liquidity or simply dark liquidity is trading volume that occurs or liquidity that is not openly available to the public. This represents trades engaged in by institutional traders and trading desks away from the exchange markets. Trading desks use these to execute large block orders without impacting public quotes or price, or revealing their investment strategy regarding any of their holding accumulations or divestitures. Orders can be placed anonymously. The concern with dark pools is that some market participants are left disadvantaged because they cannot see the trades.

Designated market maker

The DMM (sometimes called a specialist) is the member that acts as the dealer on the floor for a specific security. The DMM maintains inventory and guarantees liquidity (profit on spread). The DMM ("dealer") is responsible for maintaining a "fair and orderly" market in the assigned security. One market maker dealing the security, multiple in OTC market.

Accredited Investors

The classification of accredited is used in primary market transactions, particularly for Regulation A+ and Regulation D private placements. It has no specific use in the secondary markets.

Exchanges

The exchange market is composed of the NYSE and other exchanges on which listed securities are traded. This market is also known as the auction market. The term listed security refers to any security listed for trading on an exchange. Each exchange requires companies to meet certain criteria before it will allow their stock to be listed. The pricing system is called double auction markets - the buying and selling with multiple sellers and multiple buyers, floor participants compete among themselves.

Floor traders

The floor traders (also registered floor traders, FTs, or RFTs) are members that buy and sell on the floor for their firm's accounts. To establish a best bid, a buying broker-dealer must initiate a bid at least $0.01 higher than the current best bid. The best offer must be at least $0.01 lower than the current best offer

The forth market (the ECNs)

The forth market is a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers. These transactions take place through electronic communication networks (ECN) which are open 24 hours a day and act solely as agents.

Last

The last price a trade took place.

Market Centers

The locations, both physical and electronic, where buyers and sellers may gather and place trades.

Bid

The price that a seller would receive for the security. The bid is always lower than the ask. Demand or the price people are willing to buy the shares.

Ask

The price the buyer would have to pay to buy that security. Supply or the price people are willing to sell at and supply.

Registrars

The registrar is always a separate than the issuer of the transferring agent. Registrars are licensed by the states and provide audit and oversight services for the transfer agents.

The third market (Nasdaq Intermarket)

The third market or the Nasdaq market is a trading market in which exchange-listed securities are traded in the OTC market. Broker-dealers registered as OTC market makers in listed securities can do transactions in the third market. Involves exchange-listed securities that are being traded over-the-counter between broker-dealers and large institutional investors. The Nasdaq system tracks and provides trading for the largest OTC-traded companies. Securities on this system are considered listed.

The Securities Exchange Act of 1934

The trading of securities in the secondary market is regulated by the Securities Exchange Act of 1934. This act created the Securities Exchange Commission (SEC) and gave it the authority to regulate securities exchanges and the OTC market.

Transfer Agents

The transfer and registration of stock certificates are two distinct functions that cannot be performed by a single person or department operating within the same institution. Issuers usually use commercial banks and trust companies. They are responsible for: issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, handling problems with lost/stolen/destroyed certificates.

Guardians and executors

These persons are normally court-appointed custodians over a minor, an incapacitated adult, or an estate.

The Secondary Markets

They provide a place for the buyers and sellers of securities to connect and transact business. If it didn't exist, very few people would own stock. If there was no place to easily sell stocks for a fair price, very few people would buy them. The secondary markets provide liquidity to investors.

Dealer (Principal/market maker)

Trade with customers from own inventory. Maintain inventory. Profit on spread (markup and markdown). Concentrated its business efforts on proprietary trading

Broker (Agent/Agency)

Trades on behalf of the customers and charges commissions