Ch. 4 Trading Markets

Front 1

CQS

Back 1

Consolidated quotation service . Quotes for NYSE and AMEX ( NYSE-MKT)

Front 2

First market

Back 2

Trading on Exchange floors. The New York Stock Exchange (NYSE) and the American Stock Exchange( AMEX) now renamed New York Stock Exchange Market (NYSE-MKT).

Front 3

Network A tape

Back 3

Reports trades of NYSE listed issues, regardless of the Market Center where the trade takes place.

Front 4

Network B tape

Back 4

Reports trades of NYSE-MKT and Regional exchange listed issues.

Front 5

Network C tape

Back 5

NASDAQ is not part of CQS it was too small when CQS was created in 1979. As part of the process of becoming an exchange, NASDAQ had to show its own Consolidated quotes and publish a real-time tape of its trades called the network C tape.

Front 6

OTCBB

Back 6

Over the Counter Bulletin Board. This is a display facility run by FINRA. It displays quotes for publicly traded companies that are not listed on an exchange. These are companies that can not meet exchange-listed standards or that have been delisted (for example, the company is bankrupt).

Front 7

MSRB

Back 7

The municipal Securities Market is regulated by the MSRB the Municipal Securities Rulemaking Board.

Front 8

Second Market

Back 8

The second Market is where over the counter trading of stocks that are not listed on NYSE, and NYSE-MKT, or NASDAQ (or a regional exchange) occurs.

Front 9

Third Market

Back 9

The third Market is trading of exchange-listed Securities which takes place off the trading floor through over the counter market makers.

Front 10

Fourth Market

Back 10

Is direct trading of Securities between institutions, without the use of a broker.

Front 11

ECN

Back 11

Electronic Communication Network. Ch.4 pg.9

Front 12

SEC regulation NMS National Market System

Back 12

To Foster competition between Market centers in trading of National Market securities. Consists of rules 600 through 612. Some of these are new rules, and others are simply the renumbering of existing rules. there are three basic new rules that impact Market participants (rules 610 through 612).

Front 13

Rule 611

Back 13

Requires that trade execution occur at the best price within one second, instead of the 90 seconds that was permitted at that time( it is now reduced to 10 seconds). Human base floor trading will continue because there are opt-out Provisions from the "trade through" rule. for example and institution might want a human trader on the NYSE floor to work a large block order that is not easy to fill via an automated system.

Front 14

Rule 610

Back 14

Market centers must provide a Level Playing Field when providing access to their markets (e.g., Market access fees must be consistent across all Market participants and cannot favor one firm over another). Each market must provide for automated access and execution that does not favor one group of users over another.

Front 15

Rule 612

Back 15

Sub Penny pricing is prohibited unless the stock trades below $1. All limit orders and displayed quotes for NMS Securities (NYSE, and NYSE-MKT and NASDAQ) must be increments of pennies.

Front 16

Rule 602

Back 16

Exchanges must collect and display bids and offers.

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Rule 604

Back 17

Requires that exchanges and market makers display customer limit orders publicly, so that they can be accessed by all investors.

Front 18

Rule 605

Back 18

Requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order execution.

Front 19

Rule 606

Back 19

Reports to customers on order routing and payments for order flow.

Front 20

Rule 607

Back 20

Requires each broker-dealer to notify each new customer at account opening, and annually thereafter of:

its policies regarding receipt of payment for order flow, including a statement as to whether any payment for order flow is received for routing customer orders and a detailed description of the compensation received

and the broker dealers policies for determining the routing of each customer order that is the subject of payment for order flow.

Front 21

Rule 611

Back 21

Trade through rule. A trade through occurs when an order is executed in a given Market at a price that is inferior to the currently being posted by another Market Center. In a perfect world, this would not occur, since all trades are subject to best execution requirements. However, older systems that attempt to link markets we're less than perfect and they produce a high level of trade throughs that current computer software technology would eliminate. The new trade through rule applies to NYSE, and NYSE-MKT and NASDAQ issues. These are now called the nms stocks.

Front 22

NBBO

Back 22

National best bid and offer

Front 23

Dealers

Back 23

It is the function of the dealers to make markets in Securities. Dealers are expected to maintain an inventory of each Security in which they make a market: to buy if a customer wishes to sell, and to sell if a customer wishes to buy. Market makers in either NASDAQ or over-the-counter stocks can also deal with the public. On the exchanges, the designated Market maker firms are prohibited from dealing with the public, only the retail members are allowed to take customer orders. OTC firms are called broker-dealers because they can handle either function. Broker earns commission. Dealer earns a markup.

Front 24

Bid and ask

Back 24

The ask price is the price at which the dealer will sell the security. The bid price is the price at which the dealer will buy the security. To make a profit, the ask price is always higher than the bid- the difference is the spread-The Dealer's gross profit margin.

Front 25

Round turn

Back 25

A buy and sell

Front 26

AON

Back 26

All Or None. Either the entire order is filled or the order is not executed. Depending on the duration specified in the order, a Trader is free to attempt an entire execution again and again until the order expires.

Front 27

FOK

Back 27

Fill Or Kill. Either the entire order is filled on the first try or the order is cancelled. There can be no extra attempts at executing the order.

Front 28

IOC

Back 28

Immediate Or Cancel. Either part or all of the order is filled on the first try and the balance is cancelled. There can be no extra attempts at executing the order.

Front 29

Either/Or

Back 29

Order specifies two possible trades, EG either by 500 ABC at $40 or Sell 500 ABC at $60. If one side of the order is filled, the other side is cancelled. If one side of the order is partially filled, the remaining amount applies to both orders. For example if 300 shares were purchased at $40 the remaining order would be either by 200 ABC $40 or Sell 200 ABC at 60.

Front 30

There are four basic order types

Back 30

Market order, limit order, stop order, and stop-limit Order.

Limit order specifies a price at which to buy or sell.

There are two types of stop orders sell stops to stop a loss on a long stock position in the falling market and a buy stop to stop a lost on a short stock position in the rising market.

Front 31

Rule 76

Back 31

Prohibits Crossing of orders within firm. Order must first be exposed to exchange floor.

Front 32

Rule 77

Back 32

Prohibits any person on the trading floor from offering to bet on the course of the market, buy or sell dividends, buy or sell privileges to receive or deliver Securities, buy or sell Securities at the close, and buy or sell Securities at a stock price away from the current market.

Front 33

Rule 78

Back 33

Prohibits pre-arranged trades to sell, coupled with an offer to buy back at a stated price.

Front 34

ACT system

Back 34

The Automated Confirmation of Transaction service is a NASDAQ system that provides reporting and dissemination of last sale information on Equity Securities traded over the counter. The market venues that must report trades to ACT are:

NASDAQ (both Global Market and Capital Market)

OTCBB and pink sheets

third Market (OTC trades of listed equities)

fourth Market (ECNs).

For NASDAQ stocks, trades that occur are reported through the NASDAQ TRF (Trade Reporting Facility) that is run by ACT. Under FINRA rules, the executing party must report the trade within 10 seconds of execution. ACT also reports the trades for the other markets shown in the list via separate TRFs.

Front 35

ADF

Back 35

Alternate Display Facility, which shows quotes from ECNs that were not linked (that is, not posting quotes) NASDAQ. Since these ECNs are competing with NASDAQ, they most often choose not to link and will show their quotes only in the ADF. If a trade result, the trade must still be reported, but this is done through an ADF only system called TRACS (Trade Reporting And Comparison Service) which feeds the trade to the appropriate tape (A,B, or C).

Front 36

Dark Pool

Back 36

An evolution of ECN is the dark pool. Dark pools are operated by the larger broker-dealers EG Goldman Sachs and there are some that are independent companies EG liquidnet. They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ system. They are called Dark pools because the size of the trade and identity of the institution are not display. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade result, it still must be reported to the appropriate tape.

Front 37

BW

Back 37

Bid wanted. Indicating that the dealer wants to sell a position and is looking for a bidder (buyer). this would occur for a very thinly trade illiquid issue.

Front 38

OW

Back 38

Offer wanted, indicating that the dealer wants to buy a position and is looking for a seller. This would occur for a very thinly traded illiquid issue.

Front 39

OSS

Back 39

To help speed trading, the CBOE has an automated trading system called OSS order support system.