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3. Series 57 Rules
FINRA Series 57 Exam - Trading Rules
| Question | Answer |
|---|---|
| makers maintain firm two-sided quotes? For an NMS stock quoted at $1 or greater that has a | $0.01. |
| The folowing trades are executed at around the same | Yes, because it mets the requirement of at least 10,0 shares for a total market value of at least $10,0. Al |
| time, al buy orders, for a stock seling at about $50 a share: 2,0 shares, 4,0 shares, 3,0 shares, and 6,0 shares. Can this be considered a block trade under FINRA?s defifinition? Under FINRA rules, the defifinition of a block trade is | trades must be executed around the same time and on the same side of the market. At least 10,0 shares AND a market value of at least $10,0. |
| are alowed for institutional customers are The situation in which a blanket negative consent | When net transactions involve institutional customers. |
| and another MPID to report the trade? During a trading halt, a broker-dealer that receives a | Hold the order until trading resumes with a halt cros proces. |
| that it receives during a trading halt? The ADF does not route orders. Instead, market | Their own private conectivity systems. |
| Which types of orders are used to participate in | Market-on-close (MOC), limit-on-close (LOC) and imbalance only (IO). |
| order is The last time of day to enter a market-on-close | 3:5 p.m. ET. |
| trades permited? Flor brokers, flflor market makers, specialists and | Exchanges. |
| designated market makers are al asociated with Stocks that are listed on National Securities | National Market System (NMS) stocks. |
| entered at $10.49, at what price is the trade executed? A stock is quoted at $10.50-$10.60. If a buy order is | $10.60. The taker of the liquidity receives the price improvement. |
| is caled For what purpose does a market maker fifile FINRA | To initiate or resume quotations on an OTC stock |
| an OTC equity, what must the firm do fifirst? To comply with the order protection rule, a client?s | The best bid price available on al exchanges, the National Best Bid (NB). |
| market order to sel 10 shares of stock must be executed at what price? Definition of a trade-through | A violation that ocurs under the order protection Rule of Regulation NMS, when a client's order is not filed at |
| Under what circumstance can a market maker fifil a | the best price available. Only when a trade-through exception aplies. |
| client's market order at a price inferior to the best price available on any market? Are benchmark trades an exception to the trade- | No, they are not a trade-through exception. |
| When are Intermarket Swep Orders (ISOs) an | When they are limit orders routed to a specific trading center and also to the protected (top of bok) quotes on |
| exception to the trade-through rules? A trade qualififies for a trade-through exception due to | other exchanges. An equipment or system malfunction on the trading venue. The exception alows bypasing the protected quote |
| a self-help alert on a trading venue with a protected quote. What does the alert usualy indicate? The exception to the trade-through rules for | because the exchange is not working properly. Alow orders to be routed to a specific exchange as long as the firm sweps up the top of the bok on the other |
| what problem could arise? The SEC could declare a market-wide trading halt for | 90 days. |
| up to In the event of a national emergency, how would a | The SEC would declare the market-wide trading halt and provide notice to the President of the US. Such halts |
| multi-day market-wide trading halt normaly ocur to prevent market disruptions? When the Nasdaq halts trading in a single stock for an | may continue up to 90 days. To alow breaking news to diseminate. |
| circuit breaker and automatic 15-minute market-wide trading halt? Thre market-wide circuit-breakers can be trigered | 7% for the first 15-minute halt, 13% for the second 15-minute halt, and 20% for a halt for the rest of the trading |
| halts of A Level 3 circuit break results in a trading halt for | The rest of the day. |
| How are market declines measured, to determine | The benchmark is the previous day's close on the S&P 50. Circuit breakers are trigered by declines in the |
| when market-wide circuit breakers are trigered? When a single stock is halted for news pending, the | S&P 50 of 7%, 13% and 20% on the next trading day. Trading is re-opened only after news is publicly released. |
| investors against market manipulation, the maximum duration of this halt is What is the usual reason for a 10-day SEC single- | Investor protection. |
| stock trading halt? During a news related trading halt, T1 indicates that | Trading is halted pending the release of news. |
| During a news related trading halt, T2 indicates that | News has ben released, but not yet widely diseminated. |
| During a news related trading halt, T3 indicates that | News has ben widely diseminated. |
| During a news related trading halt, the T3 phase | Five minutes. |
| equity for public interest or news, will FINRA halt trading in the domestic ADR? If there is a foreign halt of an underlying (foreign) | No, FINRA will not halt trading of the ADR. |
| equity for regulatory reasons or fifiling defificiencies, will FINRA halt trading in the domestic ADR? Which regulatory authority has authority to halt | FINRA. |
| trading in ADRs that are listed in a US market? The Limit-Up Limit-Down (LULD) rules aim to | Extraordinary volatility in US equity markets. |
| prevent Under LULD rules, what is the reference price and | The reference price is a stock's average last sale price during the preceding 5-minute period, recalculated every |
| how often is it updated? For most stocks, during most market hours, a LULD | 30 seconds. It is updated if it is at least 1% away from the prior reference price. 5%. |
| halt ocurs when a stock's price moves at least what percent away from its reference price? Under LULD rules, how regularly is the reference | Every 30 seconds. |
| price calculated? What ocurs when a stock enters a LULD limit state? | Quotes and trading continue. |
| What is the normal duration of a LULD trading | 5 minutes. |
| pause? The maximum length of time a stock can stay in a | 15 seconds. |
| LULD limit state, before a LULD trading halt is declared During a LULD trading halt are quotes alowed to be | Yes, quotes are permited. |
| posible outcomes? During the 15 seconds after a stock enters a LULD | quote remains unexecuted and leads to a 5 minute trading halt. Normal quotes and trading continue for the 15 seconds. If quotes do not move of the LULD band, a 5-minute |
| limit state, what types of quotes and trading is permited? If a 5-minute LULD volatility half ocurs during the | trading halt is trigered. At the close, via the closing cros proces. |
| price? Under the LULD system, how can a stock exit a limit | Al limit state quotes must be executed or canceled. |
| state and continue trading uninterupted? When is a trade clearly eroneous? | If it is to far away from the last sale price. |
| the shares to be lent in a short sale? How is a short sale closed out? | The short seler purchases the stock that was shorted and returns them to the share lender. |
| A broker-dealer's available securities list must be | another broker-dealer to execute a short sale. Every 24 hours. |
| shares sold short by its clients, what does the concept of reasonable belief mean? Are of lot orders an exception to the locate rule? | dealer has no reason to know the sale is short. Yes, a sale by a broker-dealer to ofset customers' od lot orders is an exception to the locate rule. |
| buys and sels a stock. When is the broker-dealer required to net al long and short positions, to determine whether trades ocured when it was net long or net short? Definition of an independent unit agregation | A broker-dealer's ability to agregate long and short positions for each independent trading unit, rather than the |
| For a broker-dealer to qualify for independent unit | firm as a whole, for purposes of determining in which securities it is net long and net short. Each trader is asigned to only one unit and traders from one unit canot cordinate with traders from another. |
| independent unit agregation, what is the consequence? To qualify for independent unit agregation, which | short. 1) The firm must have a writen plan to identify each unit, 2) each unit must do its own agregation, 3) |
| four requirements must a broker-deale met? How often are broker-dealers required to fifile short- | traders can only be asigned to one unit, and 4) traders from one unit canot cordinate with traders from another unit. Twice per month. |
| On what day are broker-dealers' end-of-month short- interest reports due? A broker-dealer's short-interest report sumarizes | Gros short equity positions that have setled as of the 15th and last busines day of each month. |
| which positions? Are a broker-dealer's short interest reports required to | Gros short positions |
| disclose the firm's net or gros short positions? Broker-dealers must fifile short-interest reports that | The 15th of the month and last busines day of each month. |
| broker is When are short sale restrictions imposed? | When a stock's price declines more than 10% from the prior day's close. |
| ABC Co. stock closes at a price of $50 per share on | Restrictions are imposed if the price drops below $45, more than 10% below the prior day's close. They wil |
| Tuesday. On Wednesday morning, it anounces disapointing earnings, and its stock begins to drop sharply. At what price will short sale restrictions be imposed and how long will they last? Under Regulation SHO, if a stock fals more than | stay in efect al day Wednesday and Thursday. For that day and the next day. |
| 10% from the prior day close, a short sale restriction will be in efect for how long? On a day when a stock is under a short sale | Yes, but only at a price higher than the National Best Bid (NB), i.e., only on an uptick. |
| short exempt transaction will most likely result when If a short sale in an isue ocurs on a day when a short | equivalent long position. Short exempt. |
| deliver in a short sale? A failure to deliver in a threshold security must be | Before market open on the 14th day after trade date (T+14). |
| What is a broker-dealer's major responsibility when it | bok, rather than through the broker-dealer. To use risk management controls and supervisory procedures to prevent clients from entering orders that |
| gives customers direct market aces? The fifinancial risk management that broker-dealers | exced pre-set credit and capital thresholds. Eroneous orders, duplicate orders and orders that exced price or size parameters. |
| Who prepares and diseminates the threshold security | The self-regulatory organization (SRO) that maintains the primary listing. |
| securities? When executing a short sale, who has the | The introducing (or receiving) broker-dealer. This is not the responsibility of the executing broker-dealer or |
| from the prior day?s close, the result is On Tuesday, a stock's price declines 10% from the | at a price higher than the national best bid. Thursday, unles the sale ocurs at a price higher than the national best bid. |
| prior day's close. Under the uptick rule, on what day can short sales in the stock resume? A short sale may be executed at or below the best bid, | Short exempt. |
| even if the stock is otherwise subject to the circuit breaker rule due to a 10% decline. In this situation, the order ticket is marked as The short sale circuit breaker aplies during the hours | 9:30am to 4pm, normal market hours. |
| For the rest of Wednesday and al of Thursday, ABC may not be sold short unles Under the Trade-Through Rule, it is prohibited to | Inferior to protected quotes. |
| execute trades at prices Exceptions to the Order Protection Rule include | The second leg of a riskles principal trade, qualified contingent trades, crosed market trades, self-help alerts |
| When a broker-dealer or exchange experiences a | and intermarket swep orders. Raise a self-help alert. |
| can halt al trading on any exchange for a period of What does the SEC Market Aces rule require firms | Risk management controls and supervisory procedures. |
| prevent To determine if a firm is net long or short in a | Throughout the trading day. |
| security, when must a broker-dealer evaluate al of its positions? What is the purpose of the limit/up limit down | To prevent extraordinary volatility in National Market System (NMS) stocks. |
| (LULD) system? If a LULD halt ocurs in the fifinal 10 minutes of a | The closing cros, which ends the pause and sets the closing price. |
| trading day, what determines the closing price for the halted security? What trigers the end of a 15-second LULD limit | Cancelation or execution of al limit state quotes during the 15 seconds. |
| state? When a quote remains at or outside the LULD limit | A 5-minute pause is trigered by the primary listing exchange. |
| deliver in a long sale? When a short sale qualififies as short exempt, asuming | First, the order ticket must be marked “short exempt.” Secondly, if a short sale restriction is in efect, the sale |
| Buy stop orders are used to protect | A short stock position. |
| $17.45 per share, with an aditional 10 lots in reserve. This is the National Best Bid and there are no other bids at the same price. If a customer ofers to sel 5,0 shares at the market, what will hapen? Definition of a peged order. | refresh the market maker's quote and be sold. The remainder of the order (1,90 shares) will be filed at the best available price. A limit order in which the limit price automaticaly adjusts as the market price moves. |
| A primary peg order tracks | The same side of the market. |
| improves a Market Maker's (M's) quote. But the customer does not want this order to be displayed by the Market Maker. What instructions should the customer be given? The purpose of the Maning Rule on limit order | Prevent broker-dealers and market makers from knowingly trading ahead of customer limit orders, for their |
| protection is to To adhere to the Maning Rule, firms must fifil | own acounts. 60 seconds. |
| transactions? Which orders are not reduced on the morning of the | Orders that are entered at or above the market, including sel limit, buy stop, and buy stop limit orders are not |
| For purposes of enforcing the 5% policy on | securities transactions. A security's prevailing market price. |
| prevailing market price, for purposes of the 5% policy and instead uses the firm's contemporaneous cost? For debt securities, what should be used as an | The firm's contemporaneous cost. |
| with no intention of having them executed. Rather, the goal is to lure others into trading at artifificial prices driven by the orders. This violation is caled What type of trading activity creates an ilegal stock | Painting the tape, initiating multiple orders to influence a stock's price or trading volume. Often, it involves a |
| pol? Trades are placed with the intent of artifificialy | group of traders working together. Marking the open/marking the close. |
| quotes to create market confusion, they are engaging in A broker-dealer wishes to introduce a third-party | Introducing the third party helps to reduce the client?s cost. |
| securities firm to complete client trades in a particular aset clas. This is an interpositioning violation unles What type of activity creates a front-runing | Securities profesionals trading for personal gain while posesing private knowledge of a pending block |
| A shareholder holds 500 shares of stock at $30 prior to a 3-for-2 stock split. What does she own after the split? | 750 shares at $20. |
| The violation that occurs when an investor places trades with an intent to artificially affect the closing price is called | Marking-the-close. |
| moving the market to obtain benefificial execution on the other side of the market is caled The prohibited practice of introducing aditional | Interpositioning. |
| other traders to join at a manipulated price, and then trading against them, is caled The prohibited practice of front runing block | 10,0 shares or more. |
| which price should broker-dealers use as a reference point? For purposes of the 5% policy on debt securities, a | The firm's contemporaneous cost or proceds. |
| of period begin and end? Definition of a gun-jumping violation | public sale. Marketing or sales activities for an ofering that ocur before the registration statement is filed with the SEC. |
| What type of activity is not permited during the | Sales of securities are prohibited. |
| underwriters and isuers in a folow-on oferingmay be limited in their market activities is caled The type of isuer that is not subject to a Regulation | An isuer with an ADTV of at least $1 milion and a public float of at least $150 milion, refered to as actively |
| M restricted period is For a company with an ADTV of les than $10,0 | traded securities. 5 days before pricing. |
| actively traded securities? Which specifific activities are restricted for al | Biding for shares, purchasing shares, and soliciting bids or purchases from others. |
| alowed to alocate shares of a folow-on ofering to any investor who has shorted the shares in what time frame? For how many days prior to a folow-on ofering is an | Five busines days. |
| investor not alowed to short the stock in order to participate in the folow-on? An investor who wants to be alocated shares in an | Qualify as a bona fide purchaser by purchasing enough shares to ofset the short position, no later than 30 |
| isuer) can ocur at any time during the trading day except: The average daily trading volume (ADTV) in ABC | $1 milion ADTV or $150 milion public float), buybacks canot ocur during the last 30 minutes of trading. 10 milion shares. The limit is 25% of ADTV per trading day. 25% of 8 milion = 2 milion shares x 5 days = |
| market, and it is limited to 50,0 shares per trading day by the trading volume (ADTV) cap. How many block trades above the volume limit are permited? The price a company is alowed to bid to buy back its | The greater of the highest independent bid or the last independent trade. |
| average wekly trading volume over the past four weks has ben 80,0 shares. What is the most amount of control stock the company's CEO can sel? Definition of control stock | (10,0 in this case) or the average wekly trading volume in the four weks prior to the sale. The sale may ocur once every 90 days. Company stock held by insiders - executives, board members and greater than 10% owners of a company. It is |
| underwriters to increase the deal size by up to 15%. It is caled the The maximum amount by which a gren shoe clause | 15%. |
| shares they can sel over what timeframe? The limit on sale of restricted stock is determined by | A required holding period of six months. |
| that a short sale trade can ocur is The information contained in NMS Rule 605 reports | Monthly data on sped of execution, execution relative to public quotes and price improvement for trades |
| customers, urging them to buy ABC stock because of its strong fundamentals. Is this permited? The suitability standard for recomending a specifific | Whether there is a reasonable basis to believe the recomended transaction (or strategy) is apropriate for the |
| the outcome for the investor is The market view of an investor who initiates a debit | Moderately bulish. The goal is to close the position with a narowing of spreads betwen premiums, the net |
| and handle orders of broker-dealers and Trading Permit Holders are caled CBOE flflor brokers can only acept and execute | Registered broker-dealers and Trading Permit Holders. |
| options contracts? A market maker receives a customer limit order to | Nothing, because AON (al or none) indicates that the entire order must be filed or not at al. |
| buy 80 shares of ABC Corp. stock AON at $23.42. There is a customer order to sel 50 shares of ABC at $23.42. What should the market maker do? A flflor broker holds both a customer order and a | she checks the market for a beter price and alows other market participates to execute the trade on the same |
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