Series 7 Trading Markets Section 1

Front 1

Primary market

Back 1

new issues sold for the first time

Front 2

First market [within secondary market]

Back 2

Trading of exchange listed securities
Ex: NYSE, AMEX, NASDAQ

Front 3

In the first market, who provides quotes for exchange-listed securities?

Back 3

CQS - conosolidated Quotations Service

Network A Tape = reports NYSE listed issues regarless of the market center where the trade takes place
Network B Tape = reports AMEX listed issues regardless of the market center where the trade takes place
Network C Tape = reports NASDAQ listed issues regardless of the market center where the traes take place

Front 4

Second Market

Back 4

OTC trading of UNLISTED securites

Front 5

What is the OTCBB? and what is its purpose?

Back 5

OTC Bulletin Board

a display facility run by FINRA for Publicly traded companies that cannot meet exchange listing standards.
- it is not an exchange

Front 6

What TRADES OTC?

Back 6

-Publicly traded companies taht do not meet FINRA requirements to be traded on exchanges
-most corporate bonds
-commercial paper
-U.S. Govts agencies
-Munies

Front 7

What is SOLD OTC

Back 7

New issues

Front 8

What is the THRID MARKET? and what trades there?

Back 8

The OTC trading of EXCHANGE LISTED securites

-open 24 hours
-will vie to trade at slightly better prices than exchanges in order to have the order directed to them

Front 9

What is the FOURTH MARKET? and Who trades there?

Back 9

is ECNs [electronic communications networks] /ATSs - direct trading os securities between institutions OTC (these companies bypass brokers and large commissions)

-ECNs - a computer network that match customer orders to buy and sell 24 hours a day on an agency basis

- must register with FINRA as a Broker/dealer, for

-ATS - alternate trading system

Front 10

Describe Regulation ATS

Back 10

ATS - Alternate Trading System

-b/c of the growth of ECNs
-rules: the types of orders that can be palced. can not discipline its users other than restricting access to their systems

Front 11

What is the ADF and why was it created

Back 11

Alternate Display Facility

was created to display ECN quotes if the ECN wasn';t going ot post its quote in an exchange order book. i.e. the ADF allows for these quotes to be seen by all market participants

Front 12

Regulation NMS

Back 12

SEC regulation NMS (national Market system) - to foster competition btw market centers in trading
-consists of rules 600-612 with impact market participants
3 major rules:
-1. all market centers must enforce policies to prevent 'trade-throughs'
-2. when providing access to their markets, market centers cannot favor one firms over another - equal pricing
-3. all prices must be in Penny increments if it listed at $1.00 or more

Front 13

What does rule 602 state

Back 13

"Exchanges must collect diplay bids and offers"

-requires each exchange collect bids, offers and quotations sizes from broker-dealers and for disseminated and changing this for data "quotation vendors"

Front 14

What is Rule 604

Back 14

"Limit Order Display Rule"

-Requires exchanges and market makers to display customer limit orders publicly so can be access by all
-if market maker receives a customer limit order that is better priced than its own quote, must display. (so best price is always shown)
----customer can opt out of this if they specifically request the order not be shown

Front 15

What is Rule 605

Back 15

"Market Center Order Execution Report" - by market center, monthly

-Market centers must prepare and make available monthly reports Summarizing executions including:
---effective bid-ask spreads
---how market orders of various sizes were executed
---the speed of execution
---fill rates
---price improvements or dis-improvements
**OTCBB and PINK SHEET executions are excluded

Front 16

What is Rule 606

Back 16

"Reports to customers on Order Routing and Payment for Order Flow" - by firm, quarterly
(the firm pays a small amount to the retail member that directs the order to the market maker via. rebating some of its profit for executing the trade)

-detail disclosure of this order flow on the CUSTOMER CONFIRMATION
---upon customer request: firm must disclose identity of market to which the customers orders were routed int he previous 6 months and the time of execution
-Must also provide Quarterly reports on the percentage of customer orders that ere "non-directed"
---identity of 10 largest markets/market makers these non-directed orders were routed
---any other venue revieving 5% or more of the orders
---member firms relationship with that market maker
---arrangement/if any for payment for order flow or profit sharing

Front 17

What is Rule 607

Back 17

"Customer notice of payment for order flow"

- each B/D must NOTIFY each NEW customer @ ACCOUNT OPENING AND ANNUALLY THEREAFTER of:
---Order flow payment policies and details of compensation received
---the firm's policies for determining the routing of each customer order subjecting it to payment for order flow

Front 18

What is Rule 611

Back 18

"Trade-Through Rule"

-all markets that quote NYSE, AMEX, & NASDAQ stocks must be electronically linked [all national securities exchanges, NASDAQ market, ECNs, OTC market makers, block positioners & any other B/D that executes trades internally]
--*any executable order Must be executed within 1 SECOND at best posted price

Front 19

What is Rule 610

Back 19

"Market Access"

1.There must be multiple trading platforms for equities
-----ex. NYSE stocks trade on NYSE, regional exchanges, Third Market and via ECNs
-----ex. NASDAQ stocks trade via Single Book, unlinked ECNs (quoted in ADF), and regional exchanges on a UTP basis
2.Quoting market centers and participants must offer automatic execution of order (no discrimination btw members and non-members"
3. Rules est. to prevent locked &/or crossed markets

Front 20

What is Rule 612

Back 20

"Sub-Penny Quoting"

-no more sub-peny on NMS (NYSE, AMEX, NASDAQ) stocks at $1 or more
-stocks trading BELOW $1, min = $.0001
**This rule does not apply to NON-NMS stocks (ie. OTCBB or PINK Sheets)

Front 21

What do dealers do & how do they profit?

Back 21

-Dealers make markets in, and maintains inventories of securities
-The difference in the Bid and Ask (the spread) is the Deals gross profit margin
*DEALER EARNS A MARK UP*
-sells stock to person @ ASK, buys it @ BID

Front 22

What are Specialists/DMM?

Back 22

(Designated market Makers)
-Dealers on NYSE Floor
-only 1 DMM per NYSE stock
-wholesalers of securites
-doNOT deal with Public
-Deal only with Retail members of NYSE (goldman sach, merrill..)

Front 23

What/Who are Market Makers?

Back 23

-OTC dealers who register with FINRA
-expected to maintain a market in an issue
-NASDAQ uses a system of competing market makers (mult. market makers for each NASDAQ stock)
-OTC allowed to act as a Broker OR Dealer, not both

Front 24

What is the non-NASDAQ market?

Back 24

-NOT electronically linked, ex. "display facilities" only
-EX: OTCBB, Pink OTC
-to trade, must "negotiate" with market maker that posted the quote via telephone or through internet-based trade negotiation application
-there are competing market makers, but the level of competion is small

Front 25

Brokers earn ______ & Dealers earn ________

Back 25

Brokers earn a COMMISSION & Dealers earn a MARK UP

Front 26

How many types of Duration of Orders are there and what are they?

Back 26

1. DAY ORDER - canceled at the end of the day if order is not filled
2. GTC - Good till canceled
3. GTW - Good thru week
4. GTM - Good through Month
(3&4 are entered at GTC and is the firms responsibility to cancel order if it can't be filled in allotted time)

Front 27

AON

Back 27

All or None

-SEVERAL ATTEMPTS CAN BE MADE to try to fill entire order, other wise its filled in entirety or not at all

Front 28

FOK

Back 28

Fill or Kill

-ONLY ONE ATTEMPT can be made to fill, otherwise its cancelled

Front 29

IOC

Back 29

Immediately or cancel

- try to fill as much of order in ONE attempt, the unfilled portion is cancelled

Front 30

Either/Or

Back 30

2 possible trades.
-one side is filled, other is cancelled
-if partially filled, remaining ammount applies to both remaining orders

Front 31

Not Held

Back 31

Up to Trader (order is "not held" to immediate execution)

Trader will "hold back" if he thinks order (perhaps a FOK) can be better executed at another time

Front 32

Discretionary

Back 32

customer hasn't specified security and size of order

Front 33

DNR

Back 33

Do not Reduce

normally, on ex date, orders are reduced to reflect the loss of dividend; if DNR is specified, order is not reduced

Front 34

At the Opening/ At the Close

Back 34

To be filled at the Opening or Closing price, otherwise it is canceled

Front 35

Market Order

Back 35

there is no specified price, order is filled at prevailing market price

Front 36

Limit order

Back 36

Either LIMIT TO BUY or LIMIT TO SELL
-LIMIT TO BUY: order filled at specified price or better (lower)
-LIMIT TO SELL: order filled at specified price or better (higher)

Front 37

Stop Order

Back 37

to "STOP A LOSS"
Either STOP ORDER TO BUY or STOP ORDER TO SELL
-STOP ORDER TO BUY: orders the stop of filling an order if the market price rises to the specified price or higher (if market rises)
-STOP ORDER TO SELL: order the stop of selling of a order if the market falls to a specified price or lower (if market falls)

Front 38

Can you change/amend a order Ticket?

Back 38

NO.
[unless the Manager approves of this; and deatails the reasons for the change in WRITING]
----This written record is called a "cancel and Re-Bill" record

Front 39

How many general types of Orders are there and what are they?

Back 39

SIX
1. Market Order
2. Limit Order
3. Stop Order
4. Stop-Limit Order
5. OSLOBS [Open Sell Limits - Open Buy Stops]
6. OBLOSS [Open Buy Limit - Open Sell Stops]