Series 57 Chapter 5

MM holds an undisplayed buy limit for 600 at 42. If the MM buys for its account at 41.98, what does it owe the client?

The MM must do at least as well for its client as for itself. Therefore, it must buy 600 at 41.98 for the client.

Is a market maker permitted to unilaterally set its own bid and ask, dealer spread, quote increment, or share quantity?

Yes. These activities are not in violation of FINRA or Nasdaq rules.

In absence of a prevailing (active) market, __ cost is used to determine the markup on trades.

In absence of a prevailing (active) market, contemporaneous cost is used to determine the markup on trades.

May a BD assess a fee for the collection of dividends or the safekeeping of securities?

Yes. A charge may be assessed provided it is not unfair and does not discriminate among the firm's clients.

For which trades must markups be disclosed on a confirmation?

For riskless principal transactions, as well as transactions in Nasdaq or third market securities

What trades would be covered by the 5% policy?

Secondary market trades of stocks, corporate bonds, and Treasuries

True or False: If an MM sends customer limit orders to another BD for display, it is not subject to the Manning Rule.

False. If MMs send client orders to another BD or linked ECN for display, they still have a Manning obligation.

is the insertion of a third party between a customer and the best market price.

Interpositioning is the insertion of a third party between a customer and the best market price.

True or False: A relationship between an OE firm and an MM exists if they have a payment-for-order-flow arrangement.

True

True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.

False, the convertibles must already have been TENDERED for conversion.

A market maker is quoting ABC at 21.05 - 21.35, 15 x 10. What happens if it receives a client order to buy 300 at 21.10?

If the market maker's quote is improved, it must display the client's interest. Its quote is now 21.10 - 21.35, 3 x 10.

Is a net basis trade reported to FINRA as one or two transactions?

It is reported as two separate transactions.

True or False: A riskless or simultaneous transaction is subject to the 5% Policy.

True

True or False: A 200-share trade of MSFT on Nasdaq is subject to the 5% policy?

True, the 5% Policy covers trades executed in the secondary market.

True or False: A customer may provide a BD with a blanket Do Not Display request?

False. Do Not Display requests must be provided on a trade-by-trade basis.

True or False: A BD is not required to disclose a payment for order flow arrangement on a confirmation.

False. Along with the arrangement, the BD must provide additional information (upon request).

Define the contemporaneous cost (used when determining markup when no competitive market exists).

The price one BD paid another BD for a security at or about the same time as a client's trade

Under the Limit Order Display Rule, how quickly must orders that improve the market maker's quote be displayed?

Immediately, but no later than 30 seconds

What are some exemptions to the Limit Order Display Rule?

Order immediately executed, order sent to a BD or ECN that complies, block order, or customer requests "do not display"

On the ex-dividend date, what will the NMCES do to a buy order that is marked DNR?

Nothing. The order will not be adjusted downward to reflect a cash dividend.

What activities is a BD prohibited from performing when accepting payment from an issuer?

Publishing quotes, acting as a market maker, or submitting a market-making application

How often is a market center that trades NMS securities required to produce an order-execution quality report?

Monthly, according to SEC Rule 605

A BD holds a client order to buy 500 shares at $15. What would trigger an obligation to fill the client's order?

The BD purchasing for its own account at $15 or lower

Emma has two accounts with a BD. One is long 800 ABC, and the other is short 1,200 ABC. What is her net long position?

She has a zero net long position. Instead, she is net short 400 shares.

What must a firm do if it holds Jim's order and buys for its own account at a price equal to or better than Jim's?

Fill the client's order at the same price that it received

True or False: Market makers are prohibited from trading ahead of customer limit orders.

True

Market maker's quote: 17.40-17.45 8 x 7. Will the quote change upon receipt of client order to buy 300 shares at 17.42?

Yes, it changes to 17.42 - 17.45 3 x 7. A client's buy limit order competes with BD bid prices in the market.

What does the FINRA Markup Policy cover?

It covers both markup and commission charges. The charges must be fair and not excessive.

True or False: Proceeds transactions are subject to the 5% Markup Policy.

True

A client sells $10,000 of MBRT and uses the proceeds to buy $10,000 of TNLN and is charged $850. What is the markup?

Proceeds transactions are treated as single trades; therefore, the markup is 8.5% ($850 ÷ $10,000 = 8.5%).

FINRA's 5% policy addresses transactions executed in the ___ market.

FINRA's 5% policy addresses transactions executed in the secondary market.

When acting in a dealer capacity, what will a BD charge the client?

A markup or markdown

An MM is bidding 34 and holds an undisplayed buy limit at 34.02. If it receives a market order to sell, what must it do?

Fill the market order to sell at 34.02

True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.

False. She must have EXERCISED the options, rights, or warrants.

True or False: An MM that has no relationship with an OE firm is not required to offer price improvement to the OE firm.

True. However, a Manning obligation may be triggered.

Under the Limit Order Protection (Manning) Rule, what is the definition of a block order?

10,000 shares or more and a market value of $100,000 or more

True or False: A market maker must immediately display a client order that improves its quote.

True. Unless the order qualifies for an exemption found in the Limit Order Display Rule.

Define trade shredding.

Splitting clients' securities orders into multiple smaller orders to maximize payments or rebates to the member

True or False: Since the two legs of a net basis trade have different prices, both sides must be reported as principal.

True

When must a BD fill a client's limit order after executing a trade for its own account at the same or better price?

Immediately (within 60 seconds)

Which of the following details will not be included on an order ticket stop, GTC, day order, price?

Indication of a day order is not included. If not specified as a GTC order, it is assumed to be a day order.

How often must a BD disclose non-directed customer order routing information?

Quarterly

What is a market maker required to do if its quote on a non-qualifying ECN is better than its quote on Nasdaq?

It must change its Nasdaq quote to match the ECN quote, but it may have a different size.

When is interpositioning acceptable?

When the member firm is able to demonstrate that the execution was advantageous to the client

MM holds a client market order to buy and buys for its account at 23.10. At what price must it fill the client's order?

At $23.10 or better (less)

Define a riskless principal transaction?

It is when a BD buys stock for an existing client order and then fills the order at same price it paid plus a markup.

A BD holds a client order to sell 500 shares at $21. What would trigger an obligation to fill the client's order?

The BD selling from its own account at $21 or higher

For regulatory purposes, riskless principal transactions are treated as __ transactions.

For regulatory purposes, riskless principal transactions are treated as brokerage transactions.

To show evidence that the best market was obtained for an OTC equity, where must the BD record the quotes received?

On the order ticket

What details are included on an order ticket?

Buy/sell, account number/name, order qualifiers, entry/execution information, solicited/unsolicited, discretionary

Define directed order.

An order in which the client gives specific instructions regarding the routing destination

True or False: Failing to honor a firm quote provided to a specific MM or order-entry firm is a prohibited activity.

True

True or False: An MM at the inside market that receives a client limit order equal to its quote must add to its size.

True. The MM must increase its quote size, unless the order is for 10% or less of the MM's current size (deminimis).

True or False: Before executing an ABC stock trade, a BD must disclose any control relationship it has with ABC Company.

True. Disclosure may be made orally before the trade and followed up in written form at or before settlement.

How does a negative consent letter work?

A BD sends a notice to a client alerting him to a potential action that will be completed if he does not respond.

True or False: It is always prohibited for a market maker to split client orders into smaller orders.

False. Splitting orders is acceptable in order to provide for better execution (i.e., lower cost).

True or False: Firm at the inside market receives a client limit order equal to the firm's quote must add to its size.

True. It must increase the size of its quote, unless de minimis (order size is 10% or less of MM's current size).

To enable them to compete with market makers, customer limit orders are subject to rules.

To enable them to compete with market makers, customer limit orders are subject to display rules.

True or False: If block and institutional order terms and conditions are disclosed, a Manning exception is available.

True

Give some examples of BD practices that are prohibited according to the Department of Justice.

Sharing client order information, selectively backing away from quotes, coordinating prices with other market makers

What is the purpose of an information barrier between trading and research departments?

To prevent the trading department from learning of an impending report about a stock in which the firm has a position

What orders are exempt from the Limit Order Protection Rule?

Orders from institutional accounts and orders of 10,000 shares or more worth at least $100,000

An MM has an undisplayed limit order priced better than its own and receives a market order on the other side. Result?

The market order must receive price improvement to the undisplayed price.

What is the effective spread?

Twice the difference between the actual trade price and the midpoint of the quoted bid/ask spread

Do-not-display requests should be ___ and the request must be on a ___ basis.

Do-not-display requests should be documented and the request must be on a trade-by-trade basis.

True or False: A trade of 10,000 shares at $9.75 per share would be an exception to Manning.

False. To qualify for the exception, the order must be for 10,000 shares or more AND a value of $100,000 or more.

A client wants to buy at 30.10 net and the firm discloses a $.10 markup. At what price is the order protected?

$30

On a riskless principal trade, the _ on the trade must be disclosed to the client.

On a riskless principal trade, the markup on the trade must be disclosed to the client.

What is the difference in reporting a riskless principal trade and a net basis trade?

Riskless principal trades may be reported as one trade, while net basis trades require two separate reports.

What are the relevant factors a BD uses to determine the markup or commission charged on a transaction?

The security's price, type, availability, the size of the transaction, expenses incurred, and pattern of markups

What orders are exempt from the Limit Order Protection Rule?

Institutional and large retail orders (10,000+ shares and MV more than $100,000), and Intermarket Sweep Orders (ISOs)

A firm buys 1,000 shares of ABC at $20 as a principal and sells the shares to a client at $20. What is this trade?

Since the price is the same, it is a riskless principal trade (the markup is required to be disclosed).

It is a violation of the Manning Rule to ___ of a customer's limit order.

It is a violation of the Manning Rule to trade ahead of a customer's limit order.

What is a trade called if a BD buys a security to fill an existing client order at the same price it paid plus a markup?

This is called a riskless/simultaneous principal transaction.

A BD is ready to issue a favorable research report. What must exist for the BD to continue regular trading operations?

Effective information barriers must be in place.

Under the Limit Order Display Rule, how quickly must orders that improves the market maker's quote be displayed?

Immediately, but no later than 30 seconds

Collusive behavior is defined as interaction between market makers that is _.

Collusive behavior is defined as interaction between market makers that is anticompetitive.

A market maker quotes a stock at 14.50 - 15.00, 3 x 5. At what price would a customer's market order to sell be filled?

Customer market orders to sell are filled at the bid price of 14.50.

A firm splits a 1,000-share order into ten 100-share orders to increase its rebates. What is this called?

Trade shredding (a violation)

Name 3 factors that may be used when determining the markup of a security under the 5% Policy?

1) Type of security, 2) Price of security, 3) Availability of the security in the market

Due to staff shortage, BD 1 gives a client order to BD 2 to execute with extra costs passed to the client. Acceptable?

No. This is interpositioning and is not advantageous to the client.

Coordinating price quotes or delaying a trade report at the request of another MM are examples of __ behavior.

Coordinating price quotes or delaying a trade report at the request of another MM are examples of collusive behavior.

True or False: It is acceptable for one MM to share information about its positions and strategies with another MM.

False. This is an example of collusive behavior.

True or False: For principal trades, commissions must be disclosed.

False. Principal trades charge a markup or markdown which must be disclosed on the confirmation.

True or False: A market maker's quote on a qualifying ECN may be superior to its quote on Nasdaq.

True. The ECN's top-of-the-book appears on the Nasdaq quote montage. Providing access to MMs and BDs is permitted.

Under Rule 606, what must be disclosed in reports regarding non-directed customer order routing information?

Payment for order flow, internalization, or profit sharing arrangements

While holding a buy limit for 1,000 shares at 25.12, a BD buys 500 for itself at 25.12. How does the Manning Rule apply?

The BD is only required to fill as much of the client's order as it filled for its own account (500 shares).

What is exempt from the 5% policy?

Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds

How often must BDs notify their customers regarding the availability of their order routing information?

Annually

True or False: In a riskless principal transaction, a BD charges the client the same price that it paid.

True. Additionally, the markup must be disclosed.

Is a riskless principal trade reported to FINRA as one or two transactions?

It is reported as one transaction.

What transactions are exempt from FINRA's 5% Markup Policy?

Securities sold under prospectus (new issues, mutual funds) or offering circular, municipal bonds, private placements

What is required if an MM accepts a client's limit order and then executes its own trade at the limit price or better?

Immediately, but not more than 60 seconds later, it must execute the same trade for the client.

How does the Limit Order Display Rule define a block order?

An order for at least 10,000 shares or one with a value of at least $200,000

Identify the acronym: DNR?

Do not reduce

Block trades of shares or more, or $___ or more, are exempt from the Limit Order Display Rule.

Block trades of 10,000 shares or more, or $200,000 or more, are exempt from the Limit Order Display Rule.

List some of the exceptions to the Limit Order Display Rule.

Block, odd-lot, immediately executable, or AON orders, and orders sent to another BD or ECN that complies with the rule

What does the Best Execution Rule require a member firm to do?

Use reasonable diligence to obtain the best price possible for a client

What happens to a customer's order if there is a reverse split in the stock?

Orders are cancelled if there is a reverse split.

Executing a series of trades at the end of the day to manipulate the price of a security is called __.

Executing a series of trades at the end of the day to manipulate the price of a security is called marking-the-close.