S 57

SECURITIES TRAINING CORPORATION
Series 57
Crunch Time Facts Trending Topics
FINRA Rules
If an RR has an outside business activity and switches firms, the RR must still disclose this activity on
the new U4 even though it was disclosed on the previous U4.
A change of address, change of name, being charged with a felony, bankruptcy, unsatisfied judgment,
or lien all require an RR to update his U4. An RR resigning would not be required to report on his U4
since it would be reported on a U5.
The regulatory requirement for Continuing Education is required to be completed within 120 days of
the second anniversary of your first license and every three years thereafter.
If a manager tells an RR that he can go to dinner with his wife because of his good performance and
he puts the dinner as client entertainment when getting reimbursed, he would be violating FINRAs
Standards of Commercial Honor.
A cash trade settles on the trade date (regular way settlement would be T + 3).
When there is a trading halt, subordinated debentures of the issuer may still be allowed to trade.
An RR who disclosed an outside business interest to a previous employer and then joins a new B/D
must also report it to the new B/D.
Options
Identify more complex option strategies such as:
Straddles involve buying both a call and put on the same stock with the same expiration dates and
the same strike prices (long straddle), or selling both (short straddle)
An investor who buys a straddle wants volatility, whereas an investor who sells a straddle is neutral.
Combinations involve buying both a call and a put on the same stock but with either different
expiration dates and/or different strike prices (long combination), or selling both (short combination).
Spreads involve buying and selling calls (or puts) on the same stock with either different expiration
dates and/or strike prices.
If the strike prices are different, it is a price/vertical spread.
If the expiration dates are different, it is a calendar/horizontal spread.
If both the strike prices and expiration dates are different, it is a diagonal spread.
A bear call spread involves buying a call with a higher strike price and selling a call with a lower strike
price.
For more information Call 800 STC-1223 or visit www.stcusa.com
{1}
Securities Training Corporation. All Rights Reserved v3

Series 57
If the underlying stock splits 3:2, an option contract would be adjusted to represent 150 shares and
the strike price will be 2/3 of the original strike price. The total aggregate value (total shares x strike
price) would be unchanged.
A covered call is short call and long the same number of shares.
A customers signed option agreement must be received within 15 days of the account approval.
An investor is short an Oct. 70 call at 5 and long an Oct. 65 call at 8. If the stock is at 73 and the
options get exercised, what is the maximum profit excluding fees? $200.00
When you are short a 70 put and long a 65 put, you have established a Bull Credit spread.
In an option spread: if you buy the option with the lower strike price you are bullish; if you buy the
option with a higher strike price you are bearish
All other things being equal, a call option with a lower strike price will have a larger premium; for put
options the higher strike price will have a larger premium.
OPRA is The Options Price Reporting Authority (OPRA). It is a securities information processor. OPRA
disseminates consolidated last sale and quotation information originating from the national securities
exchanges that have been approved by the Securities and Exchange Commission to provide markets
for the listing and trading of exchange-traded securities options. OPRA also disseminates certain
other types of information with respect to the trading of options, such as the number of options
contracts traded, open interest and end of day summaries. OPRA also disseminates certain kinds of
administrative messages.
ETF options are exercised with the delivery of shares; index options are exercised with the delivery of
cash.
Securities
A mutual fund sales charge is also called a load.
The maximum sales charge is 8.5%.
A mutual fund breakpoint is a dollar value invested at which the sales charge is reduced.
A client who signs a letter of intent to buy a certain dollar amount of a mutual fund within 13 months
can receive a lower sales charge.
The class A mutual fund shares chart shows the respective sales loads: $25,000.00 to $50,000.00
4.5% and less than $25,000.00 5%. If the investor puts in $20,000.00 for IRA A and $5,000.00 for
IRA B, what is the correct sales load amount? $25,000.00 x 4.5% = $1,125.00
{2}

Series 57
Mutual Fund Breakpoints are available based on investments made by the individual, his/her spouse
and dependent children combined.
Which of the following is a depositary that holds shares? DTCC
Treasury stock is stock that has been issued and then repurchased by the company. The shares are no
longer outstanding, do not receive a dividend, do not have a vote, and are shown on the balance
sheet of the company.
In a tender offer, an investor who is long 100,000 shares and has a warrant which is exercised for
50,000 shares, and is short 20,000 shares may tender 130,000 shares (net long).
A REIT can pass through rental income, interest, dividends and capital gains, but NOT losses.
Depletion is a deduction in Oil and Gas Direct Participation Programs; NOT in real estate programs.
If inflation is high, interest rates will more likely increase, and long-term bonds will fall more in price
than short-term bonds (it will not help a corporation do well or decrease the likelihood of default).
Common stock, preferred stock and ADRs can pay dividends. Warrants do NOT pay dividends.
A treasury bond quoted at a bid of 97.12 ask of 97.16 has a spread of 4/32nds of a point or .125%.
The record date is used to determine to whom a dividend is paid. In order for a buyer to be entitled
to the dividend, the trade must settle in the buyers account on or before the record date.
The ex-dividend date is the first day the stock trades without the dividend. It occurs 2 business days
before the record date.
Margin
To calculate equity for a long margin account: Long Market Value Debit = Equity.
To calculate equity for a short account: Credit Balance Short Market Value = Equity
The FRB Reg. T requirement is 50% when buying or selling short.
The FINRA maintenance requirement is 25% for long positions and 30% for short positions.
A margin account that has a long stock position with a market value of $18,000 and debit value of
$11,000.00 has equity of $7,000.00 (LMV Debit = Equity).
If an investor holds $15,000.00 in a cash account and wants to buy 2 call options at $12.00 in his
margin account, he would have to move $2,400.00 from the cash account to the margin account (the
margin for options is 100% of the premium).
The margin requirement for penny stocks is 100%.
{3}

Series 57
The Broker Call Rate (the rate banks charge broker/dealers for margin loans) is the base rate used for
clients in a margin account.
The buying power in a margin account is double the SMA.
Primary Market
Money market securities (such as T-bills and commercial paper) are exempt from registration under
the 1933 Act.
Control stock sold under Rule 144 is NOT subject to a holding period but is subject to the volume
limitation (each 90 days) of 1% of the outstanding shares or the average weekly volume over the last
four weeks.
Trading Rules
A market maker is not obligated to update its quote if it sends the order to an ECN, even if that order
does not improve the ECNs best quote.
For active stock, the markup is based on the current inside market. For inactive stocks that are
dominated or controlled by the market maker, contemporaneous cost is used.
For stocks above $1.00, quotes may not be in increments of less than .01 (7.985 is not acceptable).
Quotes less than $1.00 may not be in increments of less than .0001 (.9875 is acceptable).
For an NMS stock, the minimum price improvement is $0.01 (a penny) for stocks quoted at $1.00 or
higher.
Solicited vs. unsolicited is required on an order ticket.
The capacity in which a BD acted (principal vs. agent) and commissions are disclosed on a
confirmation.
If the national best bid is $15.11 and the client places a sell limit order at $15.10, this is a marketable
limit order and should be executed at $15.11.
The ADF must be able to collect and display quotes and report executions. It is NOT an execution
system.
The OTCBB is BEST defined as a quotation system for securities not listed on an exchange.
A qualified block positioner is defined as a broker-dealer that engages in an activity where it executes
single transactions with a current market value of $200,000 or more.
A qualified block positioner requires net capital of $1,000,000.
{4}

Series 57
Reg. SHO Circuit Breaker Rule 201 (known as the alternative uptick rule) is in effect until 4:00 p.m.
the next business day (T+1) after a 10% decline.
The SECs market access rule allows the firm and its RRs to view whether a customer using a trading
system is approaching or exceeding its preset credit limit, or the customer is entering orders that
exceed price or size parameters, or are duplicates.
A marketable limit order is a limit order which is placed at a price which can be executed. For
example, a limit order to buy at $14.50 when the lowest offer is $14.00 (would buy at $14.00) or a
limit order to sell at $15.20 when the highest bid is at $15.50 (would sell at $15.50).
If an investor places an order at 10:00am and the trader learns that he missed this order at 10:15am,
the order should be executed with the price at 10:00am with a .P modifier.
A stop limit order to buy is placed above the market and is triggered with a trade at or above the stop
price. For example, a buy stop at $15.00 will be triggered with a trade at $15.00 or above.
The trading of a security back and forth between traders to give a misleading appearance of activity
and not to change ownership is referred to as painting the tape (also known as a matched sale).
Traders coordinating prices or bid/ask spreads between each other is manipulative collusion.
However traders CAN negotiate the price of a trade.
The placement of another b/d between one b/d and the best market is interpositioning.
Interpositioning is allowed if its advantageous for the client.
The amount of a markup charged could be based on liquidity, total price of security, and accessibility
of market; NOT inside market of another security.
The Threshold Securities list is created by the exchange (SRO); NOT the market maker, B/D, or
clearing firm.
Reporting Rules
If Firm A posted an offer to sell 1,000 shares and Firm B lifts the offer, Firm A is the executing firm
and has the reporting obligation (10 seconds).
For an OATS report, if the client calls to place an order at 10:30 a.m. and then the RR contacts the
trading desk at 10:40, the time the order was received is 10:30.
A transaction in a stock listed on the NYSE but traded OTC must be reported to the TRF. If the
transaction occurred on the floor of the NYSE, it would not need to be reported to the TRF.
The TRF (formerly known as ACT) is open from 8:00 a.m. to 8:00 p.m.
{5}

Series 57
The ADF can be used to publish quotes and report (accepts and decline reports); it does NOT route an
order for execution.
OATS reports do NOT include IPOs or non-convertible debt (trades subject to TRACE reporting), but
could include convertible bonds listed on Nasdaq.
A B/D is required to publish its non-directed order routing report quarterly.
An exchange is required to publish a report on the efficiency of executions monthly.
OATS reports are submitted daily by 8:00am the next calendar day.
Requests to be excused from providing price quotes (excused withdrawal) for vacations (up to 5
business days) and religious holidays must be submitted at least 1 business day in advance.
SEC RULES
Under penny stock rules (OTC equities less than $5.00), the RR is required to provide the Penny Stock
Risk Disclosure Document, the compensation charged by the dealer, and the inside market quote for
the stock; NOT the number of market makers.
B/Ds that earn less than 5% of their commissions from sales of penny stocks are exempt from the
Penny Stock Cold-Calling Rule.
Regulation FD requires intentional disclosure of material information to be disseminated
simultaneously to the public. If an accidental disclosure occurs, it must be disclosed to the public
within 24 hours (or prior to the next market open if more than 24 hours away).
MISCELLANEOUS
An employer who wants to set up a retirement account for his 15 employees should consider using a
Sep IRA
Under the Investment Advisor Act of 1940, registration is required if you provide advice, as a
business, for compensation. An accountant who provides investment advice on an incidental basis
would NOT be required to register as an investment advisor.
{6}

Series 57
Crunch Time Facts 43rd Edition
The Crunch Time Facts are a collection of statements we believe are valuable as you engage in
the final preparation to sit for your examination. These facts are not designed to raise questions,
but instead to be part of your final review used with any notes created during your studies.
Chapter
1
Facts
Overview of Financial Markets
The Securities Act of 1933 regulates new Issues.
The SEC is a U.S. Government Agency. FINRA and the Exchanges are Self-Regulatory
Organizations.
The Securities Exchange Act of 1934 regulates the secondary market.
Registered Representatives and Financial Firms
If a customer is involved in an arbitration case, a majority of arbitrators must come from outside
the securities industry.
Registered reps must complete the regulatory element of Continuing Education 2 years after
the first registration and every 3 years thereafter.
An RR and a client may share in an account with firm approval provided they share gains and
losses in proportion to their investments.
To open an account for an employee of another B/D (including spouses and dependent
children), written notification to the clients employer is required (and notify the customer that
you will notify their employer) and duplicate confirmation must be sent if requested.
An RRs must notify his employer of all outside business activities (not hobbies).
A registered person who is convicted for a statutory disqualification event, such as shoplifting, is
NOT permitted to be employed in any capacity at a brokerage firm.
A registered person who fails to complete the regulatory element of CE may still be employed at
a firm, but may only act in a nonregistered capacity.
A previously registered person who leaves a firm and returns to any FINRA member after two
years must requalify by exam.
Under FINRAs Code of Procedure, a registered person cannot be sent to prison for violating a
FINRA Rule.
Arbitration decisions may not be appealed.
BrokerCheck provides information on registered (or terminated) individuals within the last 10
years.
For an activity to be considered an expense (not subject to the $100 gift rule); the registered
representative must attend the event with the customer.
Special inactive status due to military service exempts the registered representative from the
two-year inactive status limitation and continuing education requirements.
If an RR buys two tickets to a sporting event to take a client, but is unable to attend, the best
course of action would be to ask another RR to attend the event with the client.
{7}

Series 57
3
Customer Accounts
For a joint account both parties information should be obtained.
Either person can enter orders in a joint account.
Only one custodian and one minor are permitted per minors account.
Whomever is authorized in the Corporate Resolution is permitted to enter orders in a corporate

account
A signed Power of Attorney is needed to exercise discretion over an account
SIPC protects customers if their B/D goes bankrupt
SIPC protects investors for $500,000 of which $250,000 can be cash; only a customers equity
balance is covered by SIPC in a margin account
SIPC protects each separate customer. An individual with a cash and margin account would be
covered once. If the customer also has a joint account, that would be a separate customer.
B/Ds have to file a Currency Transaction Report (CTR) for all cash transactions by a customer
during one day that exceed $10,000.
B/Ds have to file a Suspicious Activity Report (SAR)for suspicious transactions of $5,000 or more
and may not inform the client of the filing
Regular way settlement dates are as follows:

- Corporate securities: 3 business days (T +3)
- Municipal bonds: 3 business days (T +3)
- Government securities: 1 business day (T +1)
- Option contracts: 1 business day (T +1)
- Cash transactions (cash trades, cash settlement): same day
The FRB has the power to regulate margin requirements.
The Hypothecation Agreement is the pledging of securities as collateral and allows the B/D to
re-pledge them to a bank
The current Reg. T margin requirement is 50%.
In a long margin account the Long Market Value Debit = Equity
The industry minimum maintenance requirement for a long position is 25% (equity must be at
least 25% of market value).
A client must meet a maintenance call promptly.
The suitability requirements are less stringent for institutional investors.
Commodities are not regulated by the SEC and not covered by SIPC.
Equity Securities
The date the company uses to determine to whom to pay the dividend is the record date. A
stock trades ex-dividend two business days prior to the record date.
Common stockholders generally have the right to vote.
{8}

Series 57
ADRs (American Depositary Receipts) are used to facilitate the trading of foreign securities in
the United States.
GDRs (Global Depository Receipts) are depository receipts that is denominated in the investors
home currency and trade in more than one country.
The order of dates for cash dividends is; declared ex-date, record, payable.
Debt Securities
Bondholders are referred to as creditors.
If Interest rates go up, bond prices go down; if interest rates go down, bond prices go up.
Long-term bonds move more in price given a yield change
A long-term unsecured obligation of a corporation is called a debenture.
To calculate the number of shares you can convert into given the conversion price, divide the
conversion price into par value ($1,000).
Other Brokerage Products
Face amount certificate companies, unit investment trusts, and management companies are
types of investment companies.
You buy shares of an open-end investment company (mutual fund) in the primary market via a
prospectus (you purchase new shares, you do not buy shares in the secondary market).
You buy shares of a closed-end management company in the secondary market (like shares of
stock).
ETFs (Exchange Traded Funds) are mostly based on an index; can be traded like a stock;
marginable and can be sold short.
An annuity in which your growth depends on the performance of the money invested is called a
variable annuity.
GPs (general partners) have unlimited liability; LPs (limited partners) have limited liability.
REITs pass through income but cannot pass through losses.
Options
A call gives the owner the right to buy stock.
The seller/writer of a call has an obligation to sell stock at the strike price
A put gives the owner the right to sell stock.
The seller/writer of a put has an obligation to buy stock at the strike price.
Intrinsic value is the amount the option is in-the-money.
The time value is the option premium minus the intrinsic value.
Options stop trading at 4:00 pm ET on the 3rd Friday of the expiration month.
Options expire at 11:59 pm ET on the 3rd Friday of the expiration month.
Option trades settle in one business day (between OCC and B/D).
The underlying security settles in 3 business days if an option is exercised.
{9}

Series 57
The Options Clearing Corporation guarantees option contracts.
VIX options are based on the implied volatility of S&P 500 Index options.
A VIX call would be purchased in anticipation of an abrupt drop in the market.
Index options are cash settled; no securities are delivered or received when index options are
exercised.
The process of determining who is obligated to meet the terms of an option's exercise is known
as assignment.
When a stock is the subject of an even stock split (2-for-1, 3-for-1, etc.) the number of shares
under each contract remains at 100, the number of contracts increases by the amount of the
split and the strike price is reduced by the reciprocal of the split (1/2, 1/3, etc.).
Economics
The FRB controls monetary policy not fiscal policy, fiscal policy is taxation and government
spending.
The discount rate is the interest rate the Fed charge banks (lowering the discount rate eases the
money supply, raising it would tighten the money supply).
The Fed funds rate is the rate of interest banks charge each other for overnight loans.
The four phases of the business cycle in sequence are expansion, peak, recession/contraction,
trough.
The New Issue Market
There may be 35 non-accredited investors in a private placement.
B/Ds and their employees may not buy equity IPOs. Also employees immediate family
members are restricted if they give/receive material support (25%), or buy from the family
members B/D, or the family member has the ability to direct the sale.
Rule 144A: exempts Qualified Institutional Buyers (QIBs) from restrictions (six month holding
period, time and volume limitations) on the trading of restricted stock amongst other QIBs. The
securities offered under 144A may be debt or equity and may be offered by either a domestic or
foreign issuer.
Regulation M limits activities that could manipulate the price of a security during a restricted
period.
Restricted period begins 15 business days prior to pricing and ends when the distribution
is completed
Participants are prohibited from buying covered security during restricted period and must
refrain from active market making
Restricted period is 5 days prior to pricing if Public Float is less than $25MM or ADTV less
than $100,000
Restricted Period is 1 day prior to pricing if Public Float at least $25MM and ADTV at least
$100,000
No Restricted Period (for BDs only) if Actively Traded Securities Public Float at least
$150MM and ADTV $1MM
{10}

Series 57
Rule 103 - Passive Market Making

Passive market making is permitted if there is at least one independent market maker
Passive market maker (PSMM) may not bid higher than highest independent bid
PSMM may bid higher to display customer order
PSMM may increase if independent bid goes up
If independent bid is lowered must lower after buying 200 shares
PSMM daily purchase limit is higher of 30% of the ADTV or 200 shares (exception to
execute a single order)
Rule 104 (Stabilization /Penalty Bids)

Only form of price manipulation allowed by SEC
Stabilizing bid may be made at lower of (i) public offering or (ii) highest bid in principal
market
Only one syndicate member may stabilize
No limit on how long stabilizing bid may remain open
Rule 105 restricts purchase of new issues to cover short position opened during five business
day period prior to pricing
Rule 144 permits the sale of Restricted and Control stock

Restricted Stock is unregistered (e.g. Reg D private placement, Reg S, or Employee stock
received as compensation)
Restricted Stock is subject to 6 mo. holding period.
Control Stock (affiliated) registered stock owned by Corporate Insiders (i.e., officers), no
holding period
To sell Restricted or Control Stock:
- Over any 90 day period can sell greater of (i) 1% of outstanding shares or (ii) average
weekly trading volume over prior 4 weeks.
- SEC must be notified at time order is placed
- Exemption to notifying SEC if the sale does not exceed 5,000 shares and the dollar
amount does not exceed $50,000
When shares are sold under rule 144, they are no longer restricted
An accredited investor has either $1MM net worth or annual income of $200,000 ($300,000 for
a married couple) in each of the last two years.
The Green shoe clause permits a maximum of 15% additional shares to be issued.
The prospect of a stabilizing bid must be disclosed in the prospectus.
For syndicate short coverings, if stock is trading above the IPO price exercise the green shoe, if
below the IPO price buy shares in the open market.
{11}

Series 57
10
Trading Overview
Alternative Trading Systems (ATS) must be registered as either an exchange or B/D
Intermarket Trading System (ITS) routes orders between exchanges
Consolidated Quotation System (CQS) consolidates all quotes for NYSE, AMEX (now part of
NYSE), and regional exchanges (not Nasdaq stocks) including third market quotes
Not Held order gives discretion as to price and time of execution (max of 1 day or written
instructions required) regular limit orders are held orders (no discretion)
A stock trading on the NYSE or Nasdaq that has been delisted may be quoted on the OTCBB or
OTC the Pink Market.
An immediate-or-cancel (IOC) order must be executed immediately but does not need to be
executed in its entirety. Part of the order may be executed.
11
The Exchanges and OTC Market
Failure to honor a firm quote is backing away
Nasdaq level 1 shows the inside market
Nasdaq level 2 shows all market makers (MMs)
Nasdaq level 3 allows market makers to change/enter quotes
Levels 1 and 2 are available to the public
Nasdaq system hours are 4:00 a.m. 8:00 p.m.
Nasdaq MM must have firm two-sided quote between 9:30 a.m. 4:00 p.m.
Nasdaq market center execution system:

Largest order 999,999
Splitting order to fit is allowed
Principal and agency orders allowed
Orders may be entered beginning at 4:00 a.m.
Trades are automatically reported to TRF (no manual reporting required)
Nasdaq execution system is at inside market with Price/Time priority
Reserve size is available for execution but not displayed
Displayed orders have priority over non-displayed
You cant trade-through a protected quote (best bid and offer) in an automated market
InterMarket sweep order (ISO) is exempt from trade-through rule
Also exempt from Trade-through

Material delays caused by malfunctioning equipment, (referred to as the self-help exemption)
Flickering quotations (change more than once per second)
Benchmark orders, such as volume-weighted average price (VWAP) orders
Stopped orders
Transactions that were single-price opening or closing transactions
{12}

Series 57
12
Maximum access fee to quote is $0.003
Trading Rules
Registration as market maker is effective when notified by FINRA
MM can register in particular stock and start quoting the same day; must start in 5 days
B/Ds who provide customers with Direct or Sponsored access must enforce risk controls and
supervisory procedures
Broker-dealers that account for more than 1% of volume must publish quotes
Market participants are prohibited from accepting or displaying orders in pricing increments of
less than $.01
An exception is made for stocks that are valued at less than $1.00; these may be quoted in
increments no less than one hundredth of a cent ($0.0001)
MM may use supplemental MPIDs as well as Primary MPID
Supplemental MPID cannot be used for Passive Market Making or Stabilization
Supplemental MPID quotes do not have to be two-sided and are not subject to withdrawal
penalty
Supplemental MPID trades should be reported with the same MPID
Nasdaq MM unexcused withdrawal penalty is 20 business days in that stock
OTCBB and Pink Market quotes:

Real-time computer quotes for OTC stocks
May be 2-sided, 1-sided, or indications
Priced quotes are firm (except DPPs [LPs]) which are updated twice per day
Mandatory size which depends on price (could be different for bid and ask)
Must be a reporting company for OTCBB not for Pink Markets
No numeric listing standards
If 2 MMs have two-sided quotes, system will show an inside market
No unexcused withdrawal penalty
File Form 211 with FINRA 3 business days prior to quoting stating that B/D collected and
reviewed information about company
No form 211 required if stock was delisted from Nasdaq or eligible for Piggyback
exemption
Quote 12 of last 30 days; not more than 4 successive business days without quote
Nasdaq Opening Cross Order Imbalance indicator: The system will begin sending information at
9:28:00 every five seconds
Limit-on-Open (LOO) and Market-on-Open (MOO) orders are orders that may be entered,
cancelled, or replaced without restriction from 4:00 a.m. to 9:28 a.m. They may not be
cancelled, or replaced after 9:28 a.m.
Only an Opening-Imbalance-Only (OIO) order may be entered after 9:28 a.m.
{13}

Series 57
If an Opening-Imbalance-Only (OIO) order is not fully executed during the opening cross the
order is returned to the party that entered the order
Halt and IPO Cross Quote-only period begins approximately 15 minutes for IPOs and five
minutes for halts, but Nasdaq may extend if imbalance or underwriter requests
IPO and halt information will be disseminated during quote- only period every five seconds
Nasdaq Closing Cross: At 3:50 p.m., an order imbalance indicator begins dissemination (every
five seconds thereafter)
An Imbalance-Only (IO) order may be entered after 3:50 p.m., up to 3:59:59 p.m.
Limit-on-Close (LOC) orders may be entered, cancelled, or replaced without restriction from
4:00 a.m. to 3:50 p.m. Between 3:50 p.m. and 3:55 p.m., LOC orders may be cancelled only in
the case of a legitimate error, such as an error in price, size, symbol, side of the market, or order
duplication. After 3:55 p.m. LOC orders may not be cancelled or replaced for any reason.
Any order ticket to sell an equity security must be marked appropriately
When is an investor deemed to own or be long a security?

The investor or the investors agent has title to the security
The investor has purchased, but the trade has not yet settled
The investor owns convertibles that have been tendered for conversion
The investor has an option, right, or warrant that has been exercised
A B/D may not effect a short sale unless it has borrowed the security or entered into an
arrangement to borrow the security, or has reasonable grounds to believe that the security may
be borrowed and has documented compliance
B/D may use Easy to Borrow list if it is less than 24 hours old
Exceptions from the Locate Requirement

B/D accepting short sale orders from another B/D that is required to comply
By a seller that is the owner of a security and will deliver when all possible restrictions are
removed
If delivery is not made within 35 days, the B/D must either borrow or buy the securities to
close out the position
Short sales effected by a MM in connection to bona fide market making activities
Limit Up-Limit Down (LULD) Rule

Created to prevent trades in individual securities from occurring outside of specified price
bands
Price bands are based upon a reference price which is calculated based upon trades which
have occurred over the previous five minutes
Price Bands:
- S&P 500 and Russell 1000 = 5%
- All other NMS securities = 10%
- $.75 to $3.00 = 20%
- Less than $.75 = the lesser of $.15 or 75%
{14}

Series 57
Straddle State is when one side of the market is outside the price bands. This refers to a
situation when the NBB is below the lower price band or the NBO is above the upper price
band. In this situation, only one side is executable
Limit State will occur if the NBB is on or above the upper price band, or the NBO is on or
below the lower price band
If the security enters the limit state and fails to move back inside the price bands within 15
seconds, the primary listing exchange will issue a five-minute trading pause in the security.
The primary listing exchange is also permitted (but not required) to issue a trading pause if
the security is in a Straddle State
Market-Wide Circuit Breakers

Level 1: 7% decline in S&P 500 - 15 minute trading halt
Level 2: 13% decline in S&P 500 - 15 minute trading halt
Level 3: 20% decline in S&P 500 - Trading halts for remainder of the day
B/Ds must prepare reports of all short positions; both proprietary and individual
Report must be filed with FINRA within two business days after preparation
The report must be filed twice a month
SEC Rule 10b-18 Purchase of Equity Securities by Issuers

Use one B/D (may use a different B/D for after-hours trading)
Purchases should not be the first reported transaction or made within the last 10 minutes
(actively traded) or 30 minutes of the trading day
Purchases may not be made at prices higher than the highest independent bid or the last
transaction, whichever is greater
Purchase volume generally may not exceed 25% of ADTV for that security
SEC Rule 13h-1 Large Trader Reporting: Form 13H must be filed by a large trader, which is
defined as any person that exercises investment discretion in exchange-listed equities or options
and the activity is:
During the day: either 2 million shares or shares with a market value of $20 million or
During the month: either 20 million shares or shares with a market value of $200 million
These large traders must file Form 13H, obtain a unique ID number, and provide this
number to the B/Ds that they trade through
After the initial form has been filed with the SEC, large traders must file an annual report
Insider Trading
Civil Penalties: Up to three times the amount of gain or loss avoided
Additionally, the SEC may demand disgorgement of the profits
Criminal Penalties: Fines of up to $5 million and/or imprisonment for up to 20 years for
each violation
{15}

Series 57
13
Order Handling Rules
Display Rule:
If limit order improves MM quote it must immediately update its quote (within 30
seconds)
If a limit order has the same price as MM quote, is at the inside market and more than
10% of MM displayed size, the MM needs to increase the size
Exemptions from the Display rule:

Customer requests Do Not Display
Orders executed immediately on receipt
Orders sent to another broker-dealer that complies with the Display Rule
Orders sent to an ECN that complies with the ECN Alternative
Block-size orders (10,000 shares or more, or $200,000 in market value) unless the
customer request to display
Odd-lot orders
All-or-none orders
If a market maker executes an order for its own account at a price that would fill a clients order,
it must execute the clients orders immediately (within 60 seconds).
Exceptions:
Institutional accounts
Large orders of 10,000 shares worth at least $100,000
Intermarket Sweep Orders (ISOs)
The No-Knowledge Exception Provided the firm has an effective system of internal
controls
Riskless Principal Exception The rule does not apply if the firm trades for its proprietary
account for the purpose of facilitating the execution of a customers order on a riskless
principal basis
Interpositioning is generally a prohibited practice that involves the insertion of a third party
between a customer and the best market and if a member firm demonstrates that an execution
was advantageous to the client, it is acceptable
Frontrunning is where a B/D, that is in possession of material, nonpublic information regarding

an imminent block transaction, executes an order for an account in which they have an interest
Marking the Close is effecting trades near the close of trading in an attempt to influence a
stocks closing price up or down
Trade Shredding a B/D may not spilt orders into smaller orders for execution or split executions
into multiple executions with the intent of maximizing a monetary amount
Painting the tape (matched sales) is trading between market participants to create the
misleading appearance of activity without ownership actually changing
No FINRA member may accept payment from an issuer for market making
The 5% Policy is a guideline, NOT a rule.
{16}

Series 57
Certain transactions may justify a higher markup; however, there are other situations in
which 5% is too high
The policy excludes trades involving securities sold by prospectus or offering circular (e.g.,
new issues and mutual funds)
Applies to commissions and markups on agency, principal (including riskless), and
proceeds transactions with customers
Proceeds transaction when a client directs a B/D to liquidate securities and use the
proceeds to buy other securities - Markup is calculated based on one trade (as if done for
cash)
Markup is generally based on inside market, not dealers cost
If no competitive market exists, contemporaneous cost is used
Institutional Suitability Two important criteria: (1) a firm must have a reasonable basis to
believe that the institutional customer is capable of evaluating investment risks independently
and (2) the institutional customer is exercising independent judgment in evaluating the
recommendations
SEC Rule 605 Disclosure of Order Execution Information by Market CentersPublished Monthly
SEC Rule 606 Disclosure by B/Ds of Routing Information for Non-Directed OrdersPublished
Quarterly
Penny stocks are unlisted, nonNasdaq securities trading below $5 per share.
14
Trade Reporting
Trade Reporting Systems:

Nasdaq and Third Market TRF
OTCBB and Pink Market (OTC Equities) ORF
ADF Quote Executions ADF Reporting System
Who Reports
Executing B/D reports trade within 10 seconds
Order-entry firm obligation is within 20 minutes
Which party reports the transaction within 10 seconds?
- In a transaction between two member firms, the executing firm reports
- In a transaction between a member and a non-member or customer, the member
reports the trade
- An executing member is defined as the member that receives the order for execution
against its quote
If two members satisfy this definition, the seller reports
Reporting Times:
Trades between 9:30 a.m. and 4:00 p.m., report within 10 seconds; if late, use .Z along
with execution time
{17}

Series 57
Trades between 8:00 a.m. and 9:30 a.m. and 4:00 p.m. and 8:00 p.m., report within 10
seconds use .T, only report time if the report is more than 10 seconds late using .U
Trades between 8:00 p.m. and midnight, report next business day between 8:00 a.m. and
8:15 a.m., use .T and report T + 1 (as/of) with time of execution; if reported after 8:15,
use .U
Between midnight and 8:00 a.m., report between 8:00 a.m. and 8:15 a.m., use .T and
report time of the trade; if reported after 8:15 a.m., use .U
A transaction executed more than 365 days prior to the submission date is required to be
reported electronically on Form T through FINRAs Gateway system.
If a transaction can be reported electronically through a FINRA system, for example, the
TRF, Form T may not be used.
Trade modifiers:
.T - After-hours trade
.U - Pre-Open or After-market late report (i.e., not within 10 seconds)
.O - Price Override
.W - Weighted Average or Stop-Stock transactions
.P - Prior Reference Price is used to report a trade that should have been executed at an
earlier time, but was not actually executed until now .P is used to report late
execution
.Z is used to indicate a late trade report (i.e., one not reported within 10 seconds)
The following transactions are not required to be reported to the TRF.

Transactions reported automatically by another system, such as the Nasdaq Market
Center Execution System. Trades that occur on the Nasdaq Market Center Execution
System are executed and reported automatically. Therefore, trade entry into the TRF is
not required
Transactions that are a part of a primary or a secondary distribution private placement
Transactions where the buyer and seller have agreed to a price substantially unrelated to
the current market for the security (e.g., to make a gift)
Purchases or sales related to the exercise of an option or convertible security at a preestablished price not related to market value
Purchases of securities off the floor of an exchange, pursuant to a tender offer
OATS records the life of an order from receipt, to routing, to modification (if applicable), and to
cancellation or execution
OATS reports must be transmitted Daily (8:00 a.m. following day)
Daily Synchronization for both computerized clocks and mechanical time stamping devices
within one second of NIST clock
A prime brokerage account offers institutions and hedge funds the ability to receive bundled
services at reduced costs.
{18}

S 57

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

S 57

Uploaded by

Copyright:

Available Formats

SECURITIES TRAINING CORPORATION

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

The Securities Act of 1933 regulates new Issues.

The Securities Exchange Act of 1934 regulates the secondary market.

Registered Representatives and Financial Firms

Arbitration decisions may not be appealed.

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

For a joint account both parties information should be obtained.

Either person can enter orders in a joint account.

Whomever is authorized in the Corporate Resolution is permitted to enter orders in a corporate

A signed Power of Attorney is needed to exercise discretion over an account

SIPC protects customers if their B/D goes bankrupt

Regular way settlement dates are as follows:

The FRB has the power to regulate margin requirements.

The current Reg. T margin requirement is 50%.

In a long margin account the Long Market Value Debit = Equity

A client must meet a maintenance call promptly.

The suitability requirements are less stringent for institutional investors.

Common stockholders generally have the right to vote.

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

Bondholders are referred to as creditors.

Long-term bonds move more in price given a yield change

A long-term unsecured obligation of a corporation is called a debenture.

Other Brokerage Products

REITs pass through income but cannot pass through losses.

A call gives the owner the right to buy stock.

A put gives the owner the right to sell stock.

Intrinsic value is the amount the option is in-the-money.

Options expire at 11:59 pm ET on the 3rd Friday of the expiration month.

The underlying security settles in 3 business days if an option is exercised.

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

The Options Clearing Corporation guarantees option contracts.

A VIX call would be purchased in anticipation of an abrupt drop in the market.

The New Issue Market

There may be 35 non-accredited investors in a private placement.

For more information Call 800 STC-1223 or visit www.stcusa.com

Securities Training Corporation. All Rights Reserved v3

SECURITIES TRAINING CORPORATION

Rule 103 - Passive Market Making

Rule 104 (Stabilization /Penalty Bids)

Rule 144 permits the sale of Restricted and Control stock

To sell Restricted or Control Stock:

The prospect of a stabilizing bid must be disclosed in the prospectus.

For more information Call 800 STC-1223 or visit www.stcusa.com