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4. Series 57 Orders
FINRA Series 57 Exam - Handling Customer Orders
| Question | Answer |
|---|---|
| Why should retail investors generaly avoid placing | Trading in extended hours (outside market hours) has les volume, more price volatility, and wider price |
| ofered payment in exchange for initiating quotes in a security? A customer wants to sel 250 shares of ABC stock | 20. Al 250 shares are available for execution but only the next lowest round lot is quoted. |
| (buy and sel) are simultaneously executed at the same price, with a fe charged on both trades. This is caled a A market maker executes a trade in which both legs | Net transaction. |
| transaction must be The key diference betwen a riskles principal | Both legs of a riskles principal are executed at the same price, while the two legs of a net transaction are |
| transaction and a net transaction is that When a market maker executes a net transaction | executed at diferent prices. Writen consent trade-by-trade. |
| involving a retail customer, the type of consent required is In net transactions, the types of customer consent that | Writen consent trade-by-trade, verbal consent trade-by-trade, or a negative consent leter. |
| four decimals? A customer enters a limit order at 10am to buy 20 | The order to buy 10 shares at $31 is given priority as the customer is wiling to pay more to purchase the |
| would alow a market maker to sek an excused withdrawal for a period of up to What hapens when a customer submits a limit order | The order is imediately executed as a market order at the best price. |
| that croses the best quote available? When the best quote available for a stock is 45.23 X | It is converted into a market order and executed imediately at 45.27. |
| market, if the exchange showing the quote is experiencing What should a broker-dealer do with a market order | Hold the order until trading resumes and then submit it. |
| to sel 20 shares at $36.19. This means In which case will a market-on-open (MO) order be | In al cases. It is filed as a market order at the opening cros price. |
| Pink? An exception to FINRA's Form 21 fifiling is available | An unsolicited customer order. Once this order is filed or withdrawn, the market maker can no longer quote |
| Intermarket Swep Orders (ISOs) are designed to Without the ISO exception to the trade-through rules, | exchanges that met the customer's limit price. Les eficient and efective trade execution for large orders. |
| per day by price declines in the S&P 50. The percentage declines that triger them are During a 15-minute halt due to a circuit-breaker being | day. Customer orders can be acepted by broker-dealers. Market makers can enter quotes in the last 5 minutes of |
| trigered, what hapens to customer orders and quotes? Level 1 and Level 2 circuit breakers result in trading | the halt. 15 minutes. |
| What type of stock sale does not require a locate of | A long sale, when the customer owns the shares being sold. The order ticket is marked long. |
| the shares sold? An order ticket for a sale should be marked as a short | Net long the securities sold. This usualy means the client owns the securities sold. |
| sale unles the customer who requests the sale is Two ways broker-dealers can met their responsibility | 1. A definitive borowing arangement, usualy betwen the broker-dealer and an institutional investor; 2. An |
| to locate shares their customer base sels short are Definition of an available securities list | available securities list. A list of securities that a broker-dealer has identified as having available for borowing, i.e., that it can lend to |
| updated In regard to a broker-dealer's obligation to locate | A broker-dealer is not obligated to locate shares when the sale order ticket is marked long and the broker- |
| agregation, traders must work so that When a broker-dealer does not qualify for | The broker-dealer must agregate al the firm's positions to determine which are net long and which are net |
| have setled as of The minimum net capital requirement for a prime | $1.5 milion. |
| restriction, are short exempt sales alowed? If a trade is short exempt, it must be marked on the | Order ticket. |
| For a retail customer who wants to sel stock short, a | The client owns the securities, but they are subject to seling restrictions, or when the customer has an |
| sale restriction is in place, how must the order ticket be marked? What is the deadline for closing out a failure to | Before the market opens the busines day after setlement. |
| of ABC stock?s price declines by 1% on Wednesday. | The sale ocurs at a price higher than the national best bid. |
| A colared market order is canceled if | Execution would ocur at $0.25 or 5% (whichever is greater) away from the inside market at the time of order |
| (uncolared) permited? Definition of a marketable limit order | A limit order that can be executed imediately based on curent market prices. |
| Definition of a resting limit order | A limit order that rests on the limit order display bok because it is not yet executable based on curent market |
| A customer enters a limit order to sel 80 shares of a | prices. It is a resting limit order because it is not executable based on curent market prices. |
| stock at $5 when the inside market is $49.50-$49.61. What type of limit order is this? The priority of orders entered on the limit bok has | Price, time of entry, size (largest first), in that order. |
| thre levels. They are Two sel orders are entered on the order bok at the | The first order entered. Order priority is: price, time of entry and size (largest first), in that order. |
| same price, and within a few minutes of each other. One is for 40 shares. The other is for 850 shares. Which one will have order priority? If a customer places a limit order that is marketable at | Enter the order and let it rest on the order bok. |
| the time of order entry but is not marketable when the order reaches the exchange, the routing broker-dealer would most likely A customer places a limit order to buy 10 shares at | Enter the order and let it rest on the order bok, as a resting limit order. |
| A customer enters a sel stop order for 80 shares of | The order will be converted to a market order to sel 80 shares. It then will execute at the best available price. |
| diferent days? A customer is long 1,0 shares of ABC Co. stock at | day's opening cros. Stop limit order. The order would designate $2.0 as both the stop price and limit price. Once $2.0 is hit, it |
| $2.67. He wants to sel it if the price drops as low as $2.0, but not for les than $2.0 per share. What type of order should be used? Can a stop order be activated by an event other than a | would convert to a limit order to sel 1,0 shares at $2.0 or beter. Yes, if the stop triger is clearly explained to the customer. |
| bok is to To use the reserve feature of the limit order bok, a | One round lot, 10 shares. |
| Under the limit order display rule, are market makers | No, block trades are an exception the rule. |
| limit order bok within 30 seconds after receiving certain customer orders. Those orders are A market maker is not required to update its quote if a | 10%. |
| customer's order is les than what percentage of the market maker's curent quote size? Is a market maker required to update its quote when it | No, as od-lot orders are an exception to the limit order display rule. |
| receives a customer od-lot order that improves upon the market maker's price? A customer wishes to enter a limit order that | Request do-not-display at the time the order is entered. |
| customer orders within A customer enters a limit order to sel 80 shares of | Fil the customer's order at the same price or beter ($39.50), for at least the same number of shares (40) |
| ABC stock at $39.50. What must the customer's broker-dealer do if it wishes to sel 40 shares of the same stock for its own acount at $39.50? If stock is available at a price that mets a customer's | within 60 seconds of filing its own order. Those shares should go to the customer, before the customer's firm can buy or sel them for its own acount. |
| limit order price, the Maning Rule states that A firm's trades ahead of its own customer by buying | The firm's trader was not aware of the customer aware at the time he/she traded ahead. |
| shares of a stock for its own acount, while a customer limit order goes unfifiled at the same price. The exception to the Maning Rule that the firm can use to avoid a violation is If a firm buys shares for its own acount, while | Fil the customer order at the same price and in the same quantity as the firm's order, if the price mets the |
| holding a customer limit order on the same side of the market for that security, the broker-dealer must Which types of customers can opt out of the trading- | customer?s limit price. 1) Institutional customers and 2) large retail orders (defined as at least 10,0 shares and $10,0 in value. |
| trading-ahead protections of the Maning Rule. The opt-out notifification requirement of the Maning | 1) Clear writen notice at acount-opening and anualy thereafter, or 2)Clear verbal disclosure on a trade-by- |
| Rule may be met by a broker-dealer in two ways. They are The order ticket is also refered to as the | trade basis. Order memorandum. |
| order ticket? Is a CUSIP number required on an order ticket? | No. |
| Which times are included on an order ticket? | The time of order receipt, the time of order entry, and the time of order execution. |
| Whether a trade is solicited, unsolicited, or | Order ticket |
| discretionary can be found on the FINRA?s Best Execution Rule requires firms to route | The one that ofers best execution, i.e., the most favorable price posible under prevailing market conditions. |
| non-directed orders to which market? What is not a best execution factor acording to | The number of shares executed in a market. |
| FINRA rules? When must a trade confirmation be given to the | At or prior to setlement. |
| customer? Does a trade confirmation disclose the specifific source | No, but this information is provided to customers upon writen request. |
| and nature of order flflow payments to broker-dealers? A customer wants to know whether her trades are | The trade confirmation indicates whether the broker-dealer received payment for order flow. |
| generating order flflow payments for her broker-dealer. Where can she fifind this information? Is the time of order receipt included on a trade | No, but it is required on an order ticket. |
| confirmation? When is the ex-dividend date for cash-setled | One busines day after the record date. |
| ex-dividend date? Which orders are reduced on the morning of the ex- | reduced. Orders that are entered at or below the market, including buy limit, sel stop, and sel stop limit orders are |
| dividend date? A customer has placed a GTC limit order to buy 20 | reduced. Buy 20 shares at $42.61 per share as buy limit orders are adjusted downward by the amount of the dividend |
| shares of XYZ stock at $36.0, when the market price is $40.49. What will hapen to this order if there is a reverse stock split? A customer has several open buy limit orders on the | The customer can provide a do not reduce instruction to the broker-dealer. |
| limit order bok. What should the customer do to avoid having the limit prices of these orders reduced on ex-dividend dates? XYZ Co. is paying a cash dividend of 9.1 cents per | It will be adjusted down by 10 cents. If a dividend is for a fraction of a cent, round up to the next peny. |
| share. How will a resting buy limit order be adjusted on the ex-dividend date? ABC Co. is paying a cash dividend of 12.2 cents per | Remember, orders entered at or below the market, including buy limit and sel stop orders, are adjusted by the amount of the dividend on the ex-date. It is not adjusted as orders above the market, including sel limit and buy stop orders, are not adjusted. |
| share. How will a resting sel limit order be adjusted on the ex-dividend date? What is the rule on adjusting buy limit orders and sel | Adjust these orders down by the amount of the dividend rounded up to the next whole cent. Example: A 12.4 |
| stop limit orders for dividend payments in fractional amounts? What is the purpose of the 5% policy? | cent dividend is rounded up and the orders are adjusted down by 13 cents. To serve as a guide, not a rule, for the highest default fair and reasonable fes a firm can charge a customer for |
| reasonable fes, the default mark-up/down is based on What type of security typicaly does not have a | Debt securities |
| price is considered a fair and reasonable fe for a firm to charge, as a default, in customer transactions? Which equity transactions are not subject to the 5% | Trades in new isues (IPOs or folow-ons). |
| fes? Is a broker-dealer permited to charge a mark-up, | Yes, but only if the higher fe is justified based on the circumstances of the trade. |
| mark-down, or comision that exceds 5%? A Market Maker sels a stock at 20.80 when the | 4% mark-up. Always calculate mark-up/down based on the inside market, on the same side. For a bid (buy), |
| National Best Bid/Ofer is $19.80/20.0. What is the mark-up/down percent on the trade? What type of trading activity creates a colusion | use the NB. For or an ofer (sel) use the NBO. A mark-up of .80 on a $20 NBO is a 4% mark-up. Two or more traders go beyond negotiating (which is alowed) and work together to cordinate prices or the |
| violation? To comit a front-runing violation, a broker or | transaction. A block transaction. |
| trader neds to have private knowledge of what type of trade? A trader receives an order from a customer to sel | Trade shreding. |
| 16,0 shares of a stock. To generate extra comisions, the trader splits the order into thre sel orders, each entered at a diferent sel limit price. This is a violation caled A trader is given a copy of a pending research report, | Yes, it is a trading ahead violation if the trader distributes the report or discuses its contents with selected or |
| A new customer who wishes to trade peny stocks is She must return a signed and dated statement, acknowledging | receipt of the disclosure document. |
| peny stock trades must provide trade-by-trade involved. disclosure to the customer of which items? How does a customer who frequently trades peny Either by making thre peny stock trades on thre diferent | days or being a customer of the firm for at least |
| customer, is not subject to a requirement to sign and return suitability statements, prior to executing the trade? Customers of firms that receive les than what 5% | 5%. |
| percentage of their comision revenue from peny stock trades are exempt from signing and returning a suitability statement? When a dividend is paid, which shareholders are | Those that own the stock on the record date. |
| A shareholder holds $24,000 worth of a stock prior to a stock split. What is the value of the shareholder's position immediately after the split? | $24,000. |
| a 3:1 stock split. What is the position worth after the split? What action creates a marking-the-close violation? Placing trades with an intent to artificialy afect the closing | price. |
| ask spreads, they are engaging in the prohibited practice of Entering limit orders with the intended efect of | Layering. |
| parties to a transaction to generate more comision revenue is caled When is interpositioning permited? | Only if it results in a beter price for the customer. |
| withdraw large orders to create confusion and take advantage of trading oportunities, they engage in Is a trader permited to split one order into multiple | A trader is alowed to split an order for a valid reason, such as faster execution, but trade shreding to generate |
| orders for execution? The prohibited practice of entering orders to entice | aditional comisions is prohibited. Spofing |
| transactions generaly involves a transaction size of The exceptions that are permited for front runing | Having no knowledge of the pending block trade, transactions to fil prior customer orders, corect bona fide |
| block transactions include: What is true about trading stocks outside normal | erors, ofset od-lot orders, and transactions in compliance with market rules. Bid/ask spreads are higher because trading volume is thiner than during normal market hours. |
| risk disclosure document Customers must sign a suitability statement before | They have become an established customer. This means they have done at least 3 peny stock trades with the |
| each peny stock trade until For purposes of peny stock suitability statement | firm on 3 separate days, or they have had an acount for at least a year. A customer who has done at least 3 peny stock trades with the firm on 3 separate days or has had an acount |
| delivery, who is an established customer? What are the thre exemptions from the requirement | for at least a year. 1) Unsolicited orders, 2) institutional acounts, and 3) firms that receive les than 5% of their comisions |
| sugestion or recomendation from the representative, the order ticket should be marked An order ticket is marked solicited. This means | The representative sugested or recomended the trade and then the client aproved it. |
| What is the main diference betwen a solicited trade | A solicited trade is recomended by the registered representative and aproved by the customer before |
| and a discretionary trade? An order ticket is marked as discretionary. This means | execution. A discretionary trade is when the registered representative is authorized to trade on the customer's behalf. The representative is authorized to place trades on the client's behalf. |
| Where is the time of trade execution required to be | On the order ticket. The trade confirmation may (but is not required to) document time of execution. |
| documented? Is the time of order receipt required on the trade | No |
| confirmation? When broker-dealers receive payment for order flflow, | Only the fact that payment was received for order flow. |
| what information must be disclosed to the customer on the trade confirmation? How can a customer learn about the source and nature | A writen request must be made to the broker-dealer. |
| of payment that a broker-dealer has received for order flflow on her orders? Are CUSIP numbers shown on an order ticker? | No |
| What is the defifinition of a peged order? | A special type of limit order that automaticaly adjusts as the market moves. |
| What size of limit order is not required to be | An od-lot order |
| order if it represents a de minimis change in the market maker's size. De minimis means When determining an equity mark-up or mark-down, | The curent market price. The firm should not consider its own cost (basis) in the security. |
| mark-up or mark-down should reflflect the prevailing market price. This is established as The minimum price improvement for an NMS stock | One peny. This aplies to al NMS stocks trading for $1 or more per share. A bid expresed in fractions of a |
| trading for $4.25 is In a riskles principal trade, a broker-dealer buys | peny (e.g., $4.253) is not permited. One transaction. |
| 10,0 shares of stock to fifil a customer order for 10,0 shares. This is reported as how many transactions? An investor has placed an open limit order to buy 10 | Canceled. |
| shares of ABC Corp. stock at $30. At the time of a 1-for-3 reverse stock split, this order will be Securities, such as stocks and bonds, typicaly are | A clearing house. |
| deposited with What hapens to open orders during a reverse stock | Al open orders are canceled. |
| split? A customer buys 30 shares of ABC stock regular- | Wednesday. A trade confirmation must be given to the customer at or prior to setlement. |
| way on Tuesday. By what day, at latest, must the broker-dealer provide a trade confirmation for this purchase? A customer owns shares of ABC Co. stock and wants | Wednesday June 27, right on the record date. In this case, the stock will setle on June 28 (T+1) and she will be |
| buyer will not receive a dividend is When is the ex-dividend date for regular way | Record date |
| seler, has responsibility for reporting equity trades. What is the main exception to this rule? On a trade report, a firm lists its capacity as riskles | responsibility. The firm received a customer buy (or sel) order and imediately purchased (or sold) stock for its inventory to |
| principal. This means What trade modififier is used when a trade is executed | then fil the customer's order. .T |
| for a trade executed during normal market hours? When reporting a prior reference price trade, what | The actual execution time, the prior reference time, and the actual execution price. |
| a prior reference price trade is Which two times are included when reporting a stop- | 1) Stop-stock time and 2) execution time |
| stock transaction? The time of execution that should be reported for an | The time when the VWAP is calculated. |
| end-of-day volume-weighted average price (VWAP) trade is What is the price and time of execution of an end-of- | Price: The end-of-day volume-weighted average price (VWAP) at which a stock was sold that day. Time of |
| day VWAP order? Which trade modififier is used when reporting a | execution: Time, when VWAP is calculated and al VWAP orders are priced and executed. .W |
| VWAP? A customer buys 60 shares of a stock during normal | Within 10 seconds. |
| market hours. On the same trading day, the trade is canceled during normal market hours. When must the cancelation be reported? A trade executed at 5pm on Monday, canceled the | 8 pm that same day. |
| equities? Are transaction fes included on a trade report? | reported. Transaction fes such as comisions, mark-ups, and mark-downs are not included on a trade report. |
| required to do under the Fair Aces Rule? What is a locked in trade? | standards unfairly or with discrimination. A transaction on an exchange that is automaticaly reported. |
| what is a give-up? A broker-dealer helps a customer shop the market for | Agency. |
| maker is alowed to make net purchases of how many shares and at what price? What is the net purchase limit for a pasive market | bids and purchases can be no higher than best independent bid. The greater of 30% of ADTV or 20 shares per day. |
| to protecting customer limit orders during a restricted period? What is the maximum bid for a pasive market | price as its own orders. This does not change during pasive market making. The highest bid by a market maker that is not restricted (meaning not an underwriter on the folow-on ofering) |
| stock? What is the proces for confirming that a buyer of | The seler of stock must confirm that the QIB manages at least $10 milion in discretionary asets by using |
| 14A? How are qualifified institutional buyers (QIBs) defifined? | milion or broker-dealers with discretionary asets of at least $10 milion. QIBs are institutions with discretionary asets of at least $10 milion or broker-dealers with discretionary |
| reports disclosing order routing? If a customer asks to se information on how her | Data on specific routing of the customer's orders over the previous six months. |
| disclose information on orders routed to which venues? A broker-dealer routes more than 20% of its non- | 5% of non-directed customer orders. The percentage of the firm's total non-directed orders, non-directed market orders, non-directed limit orders |
| security must focus on When a new customer acount is opened, the | customer. Know your customer (KYC). |
| representative obtains and documents esential facts such as identity, background, and investment history. This proces is caled A registered representative obtains an advance copy | Yes. If the research report has not yet ben made public, this is a trading ahead violation, trading securities |
| of a research report her firm has writen, recomending XYZ Corp. stock. If she tels her clients to buy XYZ, has she comited a violation? The prohibited practice of trading securities based on | based on non-public advance knowledge of a research report. Trading ahead. |
| For NMS stocks, a Qualifified Block Positioner trades | value in a given day or 20 milion shares, or $20 milion in value in a calendar month. $20,0 or more in a single trade, or several trades at aproximately the same time, to facilitate a customer |
| Thre important exemptions to the CBOE's position | Delta hedging, firm facilitation and market-making. Dividend distributions is not an exception. |
| dividend? When might a CBOE listed option be adjusted from | After a 3:2 forward stock split. For an od split, the size of the contract is increased by the amount of the split |
| price of 65. If ABC declares a 10% stock dividend, how many shares will be represented per contract and what will be the coresponding strike price after the dividend? The key diference betwen OTC and OC exchange- | contract = $59.09. OTC options have counterparty risk while OC exchange-listed options do not |
| contra-side order. The broker can cros the two orders if What is a facilitation cros? | price/terms. The trade that ocurs when a flor broker holds a customer order and a contra-side order and wishes to cros |
| Not held (NH) orders permit flflor brokers to decide | the two orders. First, the broker must let other market participants executed on the same price/terms. The time and price at which to execute a customer order. Al orders given to flor brokers are defined as not |
| Discretionary orders are considered | Not held, unless otherwise specified. |
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