Series 57 Chapter 4

What does the halt code T.2 mean?

News is in the process of being released publicly in accordance with Regulation FD.

True or False: If a MM voluntarily terminates its clearing arrangement, it would be eligible for an excused withdrawal.

False. If its clearing arrangement is involuntarily terminated, the MM must reapply once the arrangement is renewed.

Explain the trade ahead exception that allows a market maker to not honor an order with which it is presented.

At the time of presentation, the MM is, or is in the process of, effecting a trade and will thereafter revise its quote.

The Limit Up-Limit Down (LULD) rules address sudden price movements in ____ stocks.

The Limit Up-Limit Down (LULD) rules address sudden price movements in NMS stocks.

"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?

The SEC can sue for three times the damage (profit made or loss avoided).

Is a market maker permitted to back away from a quote for an OTC security?

No. Although Regulation NMS doesn't cover OTC securities, OTC market makers are covered by a FINRA rule.

What are the two ways order tickets can be marked when selling securities?

Long (selling shares that are owned) or short (selling stock that is being borrowed)

What is the maximum civil penalty for insider trading?

Disgorgement (return) of profit and a fine of up to three times the profit made or loss avoided (treble damages)

If a BD has a fail-to-deliver position in a threshold security, when must the position be closed out?

After 13 settlement days (after 35 settlement days in the case of a security sold under Rule 144)

When must the report of all short sales executed by a BD be received by FINRA?

By the close of business on the second business day after the settlement date

A market maker is quoting stock at 14.50 - 15.00, 3 x 5. The firm must fill how many shares at the bid price?

The market maker is obligated to fill a minimum of 300 shares.

If a BD directly contacts another firm about a backing away violation, is the five-minute reporting requirement waived?

Yes. However, if the issue is not settled, the BD must immediately report it to Nasdaq Market Regulations.

Trading will exit the limit state if all limit state quotations are executed or cancelled within ___ seconds.

Trading will exit the limit state if all limit state quotations are executed or cancelled within 15 seconds.

Under Rule 10b-18, what safe harbor is provided to an issuer?

The ability to buy back its own stock in the open market. If 10b-18 is followed, market manipulation is not assumed.

Under Rule 203 of Reg. SHO, list three reasons why a BD may use borrowed securities to make delivery on a long sale.

1) BD lending a security to another BD, 2) a fail to deliver by the seller, 3) sale originated from a good faith mistake

Under Reg NMS, what is the minimum pricing unit for an NMS security?

$.01. However, if the security is priced under $1.00, the minimum is $.0001.

If the highest bid is above the lowest ask, the market is __.

If the highest bid is above the lowest ask, the market is crossed.

Give an example of a situation where a market maker is not required to honor an order with which it is presented.

The firm communicated to Nasdaq a revised quote (e.g., price or size) prior to the order's presentation.

True or False: The Nasdaq opening cross establishes the National Official Opening Price (NOOP).

True

What is the criminal penalty for insider trading by corporations?

$25 million per violation

Under 10b-18, an issuer of non-actively traded securities may not buy its stock during the last ___ minutes of trading.

Under 10b-18, an issuer of non-actively traded securities may not buy its stock during the last 30 minutes of trading.

If a BD accounts for __% of an exchange-listed security's reported volume, it must publish a quote.

If a BD accounts for 1% of an exchange-listed security's reported volume, it must publish a quote.

For a corporation, what is the maximum criminal penalty that may be assessed for insider trading?

A $25 million fine per violation

Identify the acronym: FQCS

Firm Quote Compliance System (FQCS)

Under Rule 203 of Reg. SHO, when is a BD required to close out a long sale of a 144 security due to non-delivery?

On the morning of the 36th day, by purchasing securities of like kind and quantity

Market centers must restrict short sales of a stock if it declines by __% or more from the previous day's closing price.

Market centers must restrict short sales of a stock if it declines by 10% or more from the previous day's closing price.

True or False: National best offers below the Limit Up-Limit Down upper price band are non-executable.

False. An NBO below the Limit Up-Limit Down upper price band is executable.

True or False: National best bids below the Limit Up-Limit Down lower price band are non-executable.

True. The stock's Securities Information Processor (SIP) will identify the NBB as non-executable.

To make affirmative determination for a short sale, a BD may check an ______ list that is not older than 24 hrs.

easy-to-borrow

A BD may not effect a short sale unless it has either _____ the security or made arrangements to ______ the security.

A BD may not effect a short sale unless it has either borrowed the security or made arrangements to borrow the security.

What does Regulation SHO regulate?

Short sales

True or False: Generally, when a sell order ticket is marked long, a BD may use borrowed stock to make delivery.

False. Generally, a BD is not permitted to use borrowed stock to make delivery on a long sale.

If a stock declines by 10% or more, the restriction applying to short selling remains in effect for how long?

Through the close of the next day

For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s _ price.

For Limit Up-Limit Down rules, upper and lower price bands are set around the security’s reference price.

Under Rule 204 of Reg. SHO, if a BD has a fail-to-deliver on a short sale, when is it required to close out the position?

Immediately after the fail (i.e., on T + 2), the BD must either purchase or borrow the security.

True or False: Market makers are always exempt from the borrowing requirement of Regulation SHO.

False. Market makers are only exempt when performing liquidity functions normally associated with being a market maker.

___ is placing a bid for stock with the intent to cancel it prior to execution.

Spoofing/Layering is placing a bid for stock with the intent to cancel it prior to execution.

True or False: A sale is marked long if an investor submits his warrants for exercise and immediately sells the stock.

True

Fails-to-deliver in threshold securities that have existed for _ settlement days must be closed-out.

Fails-to-deliver in threshold securities that have existed for 13 consecutive settlement days must be closed-out.

At what time does the Nasdaq Closing Cross take place?

4:00 p.m.

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than _ old.

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than 24 hours old.

To be a threshold security, how many shares must be in a failing position?

10,000 shares or more representing at least 1/2 of 1% of the total shares outstanding

Making an offer for stock with the intent to cancel it prior to execution is referred to as ____.

Making an offer for stock with the intent to cancel it prior to execution is referred to as Spoofing/Layering.

If the S&P 500 declines by 13% prior to 3:25 p.m., trading is halted for ____ minutes.

If the S&P 500 declines by 13% prior to 3:25 p.m., trading is halted for 15 minutes.

Prior to 3:25 p.m., if the S&P 500 has declined by 7%, how long will trading be halted?

For 15 minutes

If a BD believes a market maker has committed a backing-away violation, with whom does it file a report?

FINRA's Department of Market Regulation, which then reports it to the Firm Quote Compliance System (FQCS)

True or False: An excused withdrawal for up to 10 business days is permitted for circumstances beyond a MM's control.

False. For issues beyond the market maker's control, the withdrawal may be for up to five business days.

If a market maker accidentally withdraws its quote, within what time frame must it notify Nasdaq Market Operations?

Within one hour

True or False: A Nasdaq market maker can get an excused withdrawal due to excessive volatility in a stock.

False

True or False: An issuer buying back its stock in the open market must not be the first transaction reported that day.

True

If the S&P 500 declines by 13% after 3:25 p.m., trading will continue until there is a ____% decline.

If the S&P 500 declines by 13% after 3:25 p.m., trading will continue until there is a 20% decline.

Jim owns an XYZ call option and subsequently enters a sell order for XYZ stock. How is Jim's sell order ticket marked?

Jim is not long the stock since the call has not yet been exercised; therefore, the sell order ticket is marked short.

An opening imbalance order (OIO) may only be executed against what types of orders?

Limit-on-open (LOO), market-on-open (MOO), and early market hours orders

When will a security be placed on an SRO's threshold list?

When aggregate fails to deliver at a clearing firm equal 10,000 shares or more and represent .5% of outstanding shares

True or False: If FINRA halts trading on a security, a member firm may still trade the security on a foreign exchange.

False. During a halt, a member may not execute a trade for its own account or for customers, even on a foreign exchange.

True or False: Under Rule 602 of Reg. NMS, covered securities include both exchange-traded and OTC securities.

False. Under Rule 602, covered securities are those that trade on a national exchange, not OTC securities.

An order ticket is marked _ if an investor sells a stock he owns, but does not believe he can deliver by settlement.

An order ticket is marked short if an investor sells a stock he owns, but does not believe he can deliver by settlement.

True or False: Threshold securities may include Nasdaq and other exchange-listed securities and OTC equity securities.

True

True or False: The use of an Easy-to-Borrow List assists in fulfilling the locate provision of Regulation SHO.

True

To be considered a threshold security, excessive fails-to-deliver must occur for _ consecutive settlement days.

To be considered a threshold security, excessive fails-to-deliver must occur for five consecutive settlement days.

A BD must provide a list of all short sales, both proprietary and agency, to FINRA how many times per month?

Twice a month. On the 15th and on the last trading day of the month.

Following a market maker's excused withdrawal, what is the firm required to do to once again make a market?

It must reapply to FINRA. Once approval is granted, the market maker may immediately enter quotes.

Under Rule 10b-18, how many BDs may an issuer use to make open market purchases on its own behalf?

Only one BD during any trading session

If an investor has deep in-the-money call options and sells the underlying stock, is this a long sale?

No. To be a long sale, the investor must have exercised the call options.

Is a market maker eligible for an excused withdrawal in order to become a distribution participant in an underwriting?

Yes. This would be considered a Regulation M participation withdrawal.

An opening imbalance order (OIO) to buy will be executed at or below the ____ price at 9:30 a.m.

An opening imbalance order (OIO) to buy will be executed at a price at or below the bid price at 9:30 a.m.

When purchasing its own stock in the open market, above what amount is the market maker not allowed to bid?

No higher than the highest independent bid or last independent transaction price

What are the volume limitations on an affiliate or issuer repurchasing its own security?

No more than 25% of the average daily trading volume (ADTV) over a 4-week period in one day

When applying Rule 203 of Reg. SHO to a long sale of a 144 security, the seller may be given how many days to deliver?

35 calendar days may be provided to remove all restrictions and make delivery.

What is it called when a market maker fails to honor a firm quote?

A violation referred to as backing away

Before a BD may execute a short sale for a client, what is the provision regarding borrowing the security?

The BD must have arranged to borrow the stock or have reasonable belief it may be borrowed and delivered by settlement.

Define a threshold security.

Reporting co. equity with existing fails-to-deliver of 10,000+ shrs. lasting 5 bus. days and equal to .5% of total shrs.

An _ is any person who has possession of material non-public information.

An insider is any person who has possession of material non-public information.

Define affirmative determination (as it relates to Regulation SHO).

A firm's certainty in marking an order ticket long that a client will deliver the security by settlement

What happens if the S&P 500 declines by 20% at any time during the day?

The market is closed for the remainder of the trading day

If a Nasdaq or ADF market maker voluntarily withdraws its quote on a stock, it may not reapply for ___ business days.

If a Nasdaq or ADF market maker voluntarily withdraws its quote on a stock, it may not reapply for 20 business days.

Placing a bid for stock with the intent to cancel it prior to execution is referred to as ___.

Placing a bid for stock with the intent to cancel it prior to execution is referred to as Spoofing/Layering.

Identify the acronym: LULD

Limit UP-Limit Down

An investor's strategy is __ when effecting a short sale.

An investor's strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

What is the violation for a market maker failing to honor its firm quote?

Backing away

A market maker's quote appears as follows: 43.30 - 43.35, 10 x 20. What does it represent?

The firm's willingness to buy at least 1,000 shares at 43.30 and sell at least 2,000 shares at 43.35

What are treble damages?

The civil penalty for insider trading, which is three times the profit made or loss avoided

True or False: Under Limit Up-Limit Down rules, a trading pause may occur if a security enters a straddle state.

True. The primary listing market may declare a trading pause when the security is in a straddle state.

If an order-entry (OE) firm believes a market maker has backed away, what steps should be taken?

1) Contact market maker to resolve the problem, 2) If unsuccessful, file complaint with the Firm Quote Compliance System

Rule 612 of Reg. NMS sets a minimum pricing increment of $, unless the security is priced below $_ per share.

Rule 612 of Reg. NMS sets a minimum pricing increment of $.01, unless the security is priced below $1.00 per share.

What is required for a BD to effect a short sale of a security that appears on the threshold list?

The BD must have already borrowed the security or have entered into a bona fide arrangement to borrow it.

The criminal penalty for insider trading by an individual is a maximum of $_ and/or ___ years in prison.

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

True or False: An MM must maintain firm quotes during both regular market and extended trading hours.

False. An MM is only required to provide firm quotes during regular, not extended, trading hours.

What does the following entry mean? T.3 INTC Corp. 12:31 p.m./12:46 p.m.

Quoting on INTC will resume at 12:31 p.m., with trading resuming at 12:46 p.m.

What are limit-on-open (LOO) orders?

Limit orders that are to be executed at the opening cross only

Member firms are obligated to publish or disseminate only __ quotes.

Member firms are obligated to publish or disseminate only bona fide quotes.

For LULD rules, if the NBB is on the upper band or the NBO is on the lower band, the market is in a _ state.

For LULD rules, if the NBB is on the upper band or the NBO is on the lower band, the market is in a limit state.

What happens if the S&P 500 declines by 20%?

The market is closed for the remainder of the trading day.

As a general rule, when a BD marks an order ticket long, delivery must be made by the ___ date.

As a general rule, when a BD marks an order ticket long, delivery must be made by the settlement date.

For stock priced below $1.00, Rule 612 of Reg. NMS sets a minimum pricing increment of $_.

For stock priced below $1, Rule 612 of Reg. NMS sets a minimum pricing increment of $0.0001 (one-hundredth of a cent).

True or False: SEC Rule 201, which is related to circuit breakers and short sales, does not apply to OTC equities.

True. Rule 201 only applies to NMS securities, which includes those listed on the NYSE, AMEX, or Nasdaq.

If a Nasdaq or ADF market maker voluntarily withdraws its quote on a CQS security, when may the firm reapply?

One business day following the withdrawal

On Monday, a stock price falls by 10% or more resulting in short sale restrictions. How long does the restriction last?

For the remainder of Monday and all of Tuesday

True or False: A market maker publishing a firm quote is obligated to honor the price and the number of shares quoted?

True. A BD providing a firm quote is obligated to honor both the price and size displayed.

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.