Chapter 17: Order Flow

Question 1

The information required on the _______ includes:

• customer account number
• registered representative identification number
• order is solicited or unsolicited,
• order is subject to discretionary authority
• description of the security (symbol),
• number of shares or bonds to be traded
• action (buy, sell long, or sell short)
• options (buy, sell, covered
• uncovered, opening, or closing)
• order restrictions and price qualifications (e.g., market, GTC, or day order)
• type of account (cash or margin)
• time the order was received
• time of entry, and the price at which it was executed

Answer 1

order ticket

Question 2

A registered principal must approve the order promptly after execution. FINRA’s interpretation of the term promptly after execution is no later than the _____ of the trading day. Approval consists of checking for errors and—especially for discretionary accounts or trades in high-risk securities ________. Errors do happen.

Answer 2

end
suitability

Question 3

Errors do happen. A customer order is most susceptible to error at two points:
A. ________ of the order between customer and broker
B. ________ of the order from broker to wire operator.

Answer 3

communication
transmission

Question 4

Breakdowns in communication in the ordering process most often occur because of inaccurate information on an order ticket. For example, a buy limit order could be _______ entered as a buy stop order or a market order entered as a limit order. Sometimes, when a customer has more than one account, the order ticket is written for the wrong account. This can happen when there is a ________ and each has their own account and they also have a joint account. In the rush to get the trade done, the registered representative may hit the wrong button.

Answer 4

mistakenly
married couple

Question 5

Two items that are not on an order ticket are the ______ and the client’s _______. The account name or number (if a numbered account) must be on an order ticket before order execution.

Answer 5

current market price of the security
name or address

Question 6

If a mistake is made (e.g., a wrong account number), no change to the order can be made without the approval of a ________ or a ______. All the facts surrounding the change must be put in writing and retained for ______ years.

Answer 6

principal or the branch manager
3 years

Question 7

The registered representative receives a specific report after a trade is executed. He first checks this document called the “_________” against the order ticket to make sure that everything was done as the customer requested. If everything is in order, he reports the execution to the customer. If an error exists, the representative must report it to the branch office manager or principal ______.

Answer 7

execution report (Report of Execution)
immediately

Question 8

Changing an account number on an ________ requires manager approval.

Answer 8

order ticket (cancellation and rebilling)

Question 9

Sometimes the details of a trade are reported to a customer incorrectly. Even when the reporting mistake was made by the ______, the actual trade is binding on the customer. However, if execution takes place outside the customer’s instructions, the trade is _______.

Answer 9

firm
not binding

For example, if the customer order was for 200 shares and the trade was reported as 300 shares, the customer is not obligated for the extra 100 shares.

Question 10

FINRA rules require that a record of any errors be reported to the person designated to receive such error reports by the firm. At a broker-dealer, that individual would always be a ______ or someone who holds a ________ license. If justified, a _______ person with the broker-dealer (but not a registered representative) may correct a bona fide error. A representative of a broker-dealer cannot do this because of the concern that any such correction may conceal individual misconduct. All such reports should be made immediately in writing and retained for ____ years under the general record retention rules. These reports may be referred to as:
1. error reports
2. error records
3. trade correction reports
4. any number of generic names a firm might assign to them.

Answer 10

manager
principal’s
supervisory
3 years

Question 11

The last basic step taken once the order leaves the broker-dealer’s hands is payment. As would be true when shopping anywhere, the final step is the cashier. In our business, if the trade is on margin, then there is a quick stop at the _____ department to determine the final bill (the amount of the call option-premiums paid/received) before it goes to the final location of the cashier.

Answer 11

Margin

Margin is using credit. So obviously, the margin department handles credit. Students miss questions like this because they think there is a trick.

Question 12

Quoting Systems:
Orders generally begin by getting a quote for the security. These quotes can come from:
A. __________
B. __________
C. __________

Answer 12

A. Nasdaq Quotation Service (NQS)
B. Trade Reporting and Compliance Engine (TRACE)
C. Trade Reporting Facilities (TRFs)

Question 13

Quoting Systems:
Nasdaq Quotation Service (NQS):
The system provides three levels of stock quotation service to the securities industry:
Nasdaq Level ______ is available to registered representatives through a variety of public vendors. This level displays the inside market only, the highest bids and the lowest asks for securities included in the system, and other basic information such as last sale and volume. Normal market price fluctuations prevent a registered representative from guaranteeing a price to a client.

Answer 13

Nasdaq Level 1

Question 14

Quoting Systems:
Nasdaq Quotation Service (NQS):
The system provides three levels of stock quotation service to the securities industry:
Nasdaq Level ______ is available to approved subscribers only. This level provides the current quote and quote size available from each market maker in a security in the system. To list a quote on this level, a market maker must guarantee that the quote is firm for at least 100 shares.

Answer 14

Nasdaq Level 2

Question 15

Quoting Systems:
Nasdaq Quotation Service (NQS):
The system provides three levels of stock quotation service to the securities industry:
Nasdaq Level ______ provides subscribers with all the levels of services and allows registered market makers to input and update their quotes on any securities in which they make a market.

Answer 15

Nasdaq Level 3

Question 16

Quoting Systems:
Nasdaq Reporting:
The computerized information system that tracks _______ equities trading is called the National Association of Securities Dealers Automated Quotation service (Nasdaq). Most of the services we are going to discuss apply largely or exclusively to Nasdaq.

Answer 16

Over-The-Counter (OTC)

Question 17

Quoting Systems:
The _________ provides a computer link between broker-dealers that trade Over-The-Counter (OTC).

Answer 17

Nasdaq Quotation Service (NQS)

Question 18

Quoting Systems:
Nasdaq Reporting:
Not all Over-The-Counter (OTC) securities are listed on Nasdaq. For instance, _______ and _______ securities, while they are only traded Over-The-Counter (OTC), are not listed on Nasdaq. They are bought directly from the issuer.

Answer 18

government and municipal

Question 19

Role of the NYSE Designated Market Maker (DMM):
A DMM is a person who represents a member firm of the NYSE. The DMM’s primary role is to facilitate trading in certain stocks. DMMs must make a market in the stock they trade by displaying their best bid and ask prices to the market during trading hours. They also are required to maintain a _______ in the stocks they trade. They do this by stepping in with their own capital to help reduce _______ when there is an imbalance of buy and sell orders. Although the number of stocks a DMM trades depends on how actively the stock trades, most DMMs are responsible for trading between _____-_____ stocks.

Answer 19

fair and orderly market
market volatility
5–10

Question 20

Role of the NYSE Designated Market Maker (DMM):
In addition to maintaining an orderly market, a secondary function of the DMM is to minimize _____ that may occur at the opening of daily trading. They do this by buying or selling (as a dealer) stock from ______ only when a need for such intervention exists. Otherwise, the DMM lets ______ supply and demand set the market’s course. Maintaining a market in a stock requires considerable financial resources. Therefore, the DMM must have enough ______ to maintain a substantial position in the security.

Answer 20

price disparities
their own inventory
public
capital

Question 21

Role of the NYSE Designated Market Maker (DMM):
A DMM must abide by certain NYSE floor rules in the daily conduct of her business. The DMM:

• must maintain a fair and orderly market
• must stand ready to buy and sell for her own account, if necessary, to maintain a fair and orderly market
• is expected to transact business for her own account in such a way as to maintain price continuity and minimize temporary price disparities attributable to supply and demand differences
• must _____ transacting business for her own account at the opening or reopening of trading in a stock if this would upset the public balance of supply and demand
• must file the reports and keep the books and records the _____ requires
• may trade for her own account _______ the current bid and ask quotes in its book.

Answer 21

avoid
NYSE
between

Question 22

Role of the NYSE Designated Market Maker (DMM):
The DMMs are both agents and principals. On the NYSE floor, they can act in the following ways:

As _______, they execute all orders brokerage firms leave with them. They accept certain kinds of orders from members, such as limit and stop orders, and execute these as conditions permit.

Answer 22

Agents

Question 23

Role of the NYSE Designated Market Maker (DMM):
The DMMs are both agents and principals. On the NYSE floor, they can act in the following ways:

As _______, they buy and sell in their own accounts to make markets in assigned stocks. They are expected to maintain continuous, fair, and orderly markets—that is, markets with reasonable price variations. However, a DMM may not buy stock for her own account at a price that would ______ with the current market.

Answer 23

principals or dealers
compete

In other words, a DMM cannot buy, as principal, at a price that would satisfy a customer’s order to buy.

Question 24

Quoting Systems:
Nasdaq Quotation Service (NQS):

The SEC adopted Rule 613 to create a comprehensive _______ that would allow regulators to efficiently and accurately track all activity, including options, throughout the U.S. markets in ______ securities. The rule specifies the type of data to be collected and when the data are to be reported to a central repository.

Answer 24

Consolidated Audit Trail (Rule 613)
National Market System (NMS) securities

Question 25

Quoting Systems: Nasdaq Quotation Service (NQS): The SEC adopted Rule 613 to require each SRO, as well as their respective members, to provide certain detailed information to a central repository regarding each quote and order in a security, and each reportable event with respect to each quote and order. These include: A. _________ B. _________ C. _________ D. _________ E. _________

Answer 25

A. Cancellation B. Routing C. Origination D. Modification E. Execution

Question 26

Dark Pools of Liquidity: Dark pools, sometimes called dark pools of liquidity, is trading volume that occurs or liquidity that is not openly available to the _____ for viewing and evaluation. The bulk of this volume represents trades engaged in by institutional traders and trading desks of large broker-dealers away from the exchange markets.

Answer 26

public

Question 27

Dark Pools of Liquidity: Generally, these are large-volume transactions that occur on ________ or ________ that match buy and sell orders electronically for execution without routing the order to an exchange or other market where the quote, last sale price, and volume information are displayed. That said, there is an element of ______ within the system itself.

Answer 27

proprietary crossing networks or alternative trading systems (ATS) price discovery

Question 28

Dark Pools of Liquidity: Institutional trading desks that use dark pools are able to execute ________ orders without affecting public quotes or price or revealing their ________ regarding any of their holding accumulations or divestitures.

Answer 28

large block investment strategy

Question 29

Dark Pools of Liquidity: Dark pool orders can be placed _____ so that the identity of the entity placing the order and the volume and price for the transaction are unknown to the general investing public.

Answer 29

anonymously

Question 30

Dark Pools of Liquidity: The concern with dark pools is that some market participants are left _______ because they cannot see the trades, volume, or prices agreed upon within the pools, and thus market ______ is darkened.

Answer 30

disadvantaged transparency

Question 31

Trade Reporting and Compliance Engine (TRACE): The ________ is the FINRA-approved trade reporting system for corporate and government agency bonds trading in the OTC secondary market. Reporting enables better market _______ as trade details are disseminated immediately to the investing public.

Answer 31

Trade Reporting and Compliance Engine (TRACE) transparency

Question 32

Trade Reporting and Compliance Engine (TRACE): Trade Reporting and Compliance Engine (TRACE) is a trade ______ system only. It is not an execution system. It does not accept quotations, nor does it provide settlement and clearance functions.

Answer 32

reporting

Question 33

Trade Reporting and Compliance Engine (TRACE): Following are the reporting rules for TRACE: A. ______ sides of the transaction must report. A. Trades must be reported as soon as practicable and no later than ______ minutes after execution. C. Execution date, time of trade, quantity, price, yield, and if price reflects a commission charged are all reportable and _______.

Answer 33

A. Both B. 15 minutes C. displayed

Question 34

Trade Reporting and Compliance Engine (TRACE): Following are the reporting rules for TRACE: While these three securities are TRACE eligible, they have exclusions. A. Corporate Debt Securities B. Asset-Backed Securities (ABS) C. Treasury securities D. Collateralized Mortgage Obligations (CMOs) The following is a list of exclusions to know: 1. Debt of ______ governments 2. ________ instruments 3. Debt securities that are not ______ eligible.

Answer 34

1. foreign 2. Money market 3. depositary trust

Question 35

Trade Reporting and Compliance Engine (TRACE): _______ are facilities through which members report transactions in stocks listed on the NYSE and the Nasdaq Stock Market when the trades are made via the Over-The-Counter (OTC) exchange.

Answer 35

Trade Reporting Facilities (TRFs)

Question 36

Trade Reporting Facilities (TRFs): All Over-The-Counter (OTC) transactions in equity securities to which a FINRA member is a party must be reported to FINRA, unless the transaction is expressly _________ from the trade reporting rules.

Answer 36

Exempted from Reporting to an Exchange

Question 37

Trade Reporting Facilities (TRFs): Reportable transactions include Over-The-Counter (OTC) trades in Over-The-Counter (OTC) equity securities and transactions in restricted equity securities effected pursuant to Securities Act _______. These specific trades are made by qualified institutional buyers. This even includes secondary transactions in ______ and ______ securities.

Answer 37

Rule 144A (Reportable to an Exchange) unlisted DPP and REIT

Question 38

Trade Reporting Facilities (TRFs): The normal market hours are from 9:30:00:000 am until 4:00:00:000 pm _______ time, and trades with an execution time outside of this period are considered outside normal market hours. The FINRA facilities support _______. Thus, for example, a trade executed at 4:00:00:001 is considered _______ normal market hours and must be modified accordingly.

Answer 38

Eastern milliseconds outside

Question 39

Trade Reporting and Compliance Engine (TRACE) Subscribers can access last sale information on eligible fixed income such as _______ bonds and _______ debentures transactions in the OTC market.

Answer 39

corporate U.S. agency

Question 40

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): The electronic municipal market access (EMMA) website is funded and operated by the _______. EMMA is a centralized online site used to locate key information about municipal securities.

Answer 40

Municipal Securities Rulemaking Board (MSRB)

Question 41

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): The information on EMMA is presented for retail, nonprofessional investors. It is free of charge. EMMA makes available ________ for most new municipal bond offerings, 529 college savings plans, and other municipal securities.

Answer 41

official statements (OSs) which is the municipal equivalent of a prospectus.

Question 42

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): Ratings information is also available. In fact, if an issuer's rating changes, the information surrounding the change is _______ on EMMA.

Answer 42

displayed

Question 43

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): EMMA also provides real-time access to prices as well as prices and rates from remarketing agents regarding ______.

Answer 43

auction rate securities (ARS)

Question 44

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): The MSRB operates the _______. The system collects and records transaction data in municipal securities for public market transparency, surveillance purposes, and analytics.

Answer 44

Real-Time Transaction Reporting System (RTRS)

Question 45

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): Broker-dealers and municipal securities dealers must report transactions in municipal securities pursuant to MSRB Rule G-14. One notable exception from the reporting requirements are _______ securities. These securities are included on EMMA but not RTRS.

Answer 45

municipal fund securities (e.g., Section 529 plans) Municipal fund securities (i.e., Section 529 plans) are included in EMMA but not RTRS.

Question 46

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): Real-Time Transaction Reporting System (RTRS): Firms may employ agents for the purpose of submitting transaction data. However, the primary responsibility for timely and accurate submission remains with the firm that effected the transaction. The data are captured and made available to the marketplace within _______ minutes of a trade.

Answer 46

15 minutes

Question 47

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): Real-Time Transaction Reporting System (RTRS): For regulatory purposes, RTRS maintains an _________ and provides regulators with transaction data and related information to enhance surveillance capabilities. The RTRS surveillance database stores each trade report submitted by or on behalf of a dealer.

Answer 47

audit trail

Question 48

Municipal Bond Reporting: Electronic Municipal Market Access (EMMA): Real-Time Transaction Reporting System (RTRS): ________ reports provide, among other things, information about trades effected by a dealer, modifications and cancellations reported by or on behalf of a dealer, and trades in specific municipal securities shown by their _______ numbers.

Answer 48

Audit trail Committee on Uniform Securities Identification Procedures (CUSIP)

Question 49

Types of Markets: The __________ market is a trading market in which exchange-listed securities are traded in the Over-The-Counter (OTC) market. Broker-dealers registered as _______ in listed securities can do transactions in this market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for Over-The-Counter (OTC) trading as long as the trades are reported within ______ seconds of execution.

Answer 49

third market Over-The-Counter (OTC) market makers 90 seconds

Question 50

Types of Markets: The __________ market is a market for _______ investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers. These transactions take place through ________. These exchanges are open 24 hours a day and act solely as agents.

Answer 50

fourth market institutional electronic communications networks (ECNs)

Question 51

Types of Markets: The __________ refers to a security not currently traded on Nasdaq but that instead is traded on the ______. This market consists of broker-dealers who are not willing or able to ______ quote Over-The-Counter (OTC) securities because of a lack of: A. investor interest B. company information availability C. regulatory compliance

Answer 51

grey market Over-The-Counter (OTC) Pink Open Markets publicly

Question 52

Safe Harbor: Broker-dealers typically provide a bundle of services to investment advisers. These include _______ and execution of transactions.

Answer 52

research

Question 53

Safe Harbor: Originally, the term safe harbor literally meant a safe place for a ship to enter, especially during a storm or war. In the business world, it has come to mean a method of behavior that avoids running afoul of the law. In our case, the term safe harbor in Section 28(e) of the Securities Exchange Act of 1934 describes compensation to an investment adviser from a broker-dealer that will generally not be considered _______.

Answer 53

unethical

Question 54

Safe Harbor: The research provided can be either _______ -created and provided by the broker-dealer or _______ - created by a third party but provided by the broker-dealer. Because commission dollars pay for the entire bundle of services, the practice of allocating certain dollars to pay for the research component is called _______. The SEC has defined this practice as arrangements under which products or services other than execution of securities transactions are obtained by an investment adviser from or through a broker-dealer in exchange for the direction by the investment adviser of client brokerage transactions to the broker-dealer.

Answer 54

proprietary third-party soft dollars

Question 55

Safe Harbor: Because of the ________ that exists when an investment adviser receives research, products, or other services as a result of using the commissions generated by client trades, the SEC requires advisers to disclose _______ to their clients. Here is an example of a statement found in one adviser's brochure: “We may direct transactions for your account to registered broker-dealers in return for research products and services that assist us in making decisions about investments. The research products will be used to generally service all of our clients, so the brokerage commissions you pay may be used to pay for research that is not used in managing your account.”

Answer 55

conflict of interest soft dollar arrangements

Question 56

Safe Harbor: The SEC believes that an adviser accepting soft dollar benefits must explain that: A. the adviser benefits because it does not have to produce or pay for the _____ or other products or services acquired with soft dollars. B. the adviser has an ____ to select or recommend brokers based on the adviser's interest in receiving these benefits rather than on the client's interest in getting the most favorable execution.

Answer 56

research incentive

Question 57

It is important to know what is and what is not included in the safe harbor provisions. Here are some of the items that, if received as soft dollar compensation, would likely be Allowed? or Prohibited? under the safe harbor provisions in Section 28(e): - Research reports analyzing the performance of a particular company or stock - Financial newsletters and trade journals if they relate with appropriate specificity - Quantitative analytical software - Seminars or conferences with appropriate content - Effecting and clearing securities trades

Answer 57

Allowed

Question 58

It is important to know what is and what is not included in the safe harbor provisions. Here are some of the items that, if received as soft dollar compensation, would be Allowed? or Prohibited? under the safe harbor provisions in Section 28(e): - Telephone lines - Office furniture, including computer hardware - Travel expenses associated with attending seminars - Rent - Any software that does not relate directly to the analysis of securities - Payment for training courses for this exam - Internet service

Answer 58

Prohibited

Question 59

FINRA defines the ________ as "a series of rules, interpretations, and explanations designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business, particularly with regards to operational and settlement issues."

Answer 59

Uniform Practice Code (UPC)

Question 60

The _________ helps to maintain and organize practices such as: 1. trade terms 2. deliveries 3. payments 4. dividends 5. computation of interest 6. marking to the market

Answer 60

Uniform Practice Code (UPC)

Question 61

Uniform Practice Code (UPC): FINRA created the Uniform Practice Code (UPC) so that: - transacting day-to-day business by members may be simplified and _______. - business disputes and misunderstandings, which arise from uncertainty and lack of ______ in such matters, may be eliminated. - the mechanisms of a free and ______ market may be improved and run smoothly. Uniform Practice Code (UPC): All Over-The-Counter (OTC) transactions in securities by members, except transactions in securities that are exempted the Securities Exchange Act of 1934, including municipal securities, are subject to the provisions of the Uniform Practice Code (UPC). For exam purposes, the most tested portion of the Uniform Practice Code (UPC) deals with delivery and payment of securities transactions.

Answer 61

facilitated uniformity open

Question 62

Settlement: Making _______ delivery is a delivery where everything is in good order so that a transaction settles satisfactorily. There are a number of requirements, such as the proper time, size, and documentation. It is the _______'s responsibility to ensure that a security is in good deliverable form when a customer sells it.

Answer 62

Good delivery registered representative

Question 63

Settlement: Time for Delivery: The settlement date is the date on which _______ changes between buyer and seller. It is the date on which broker-dealers are required to exchange the securities and funds involved in a transaction and on which customers are requested to ______ for securities bought and to ______ securities sold. There are several specified good delivery times.

Answer 63

ownership pay deliver

Question 64

Settlement: Regular Way Settlement: Unless otherwise specified at the time of the trade, all settlements are made the regular way. Regular way settlement for most securities transactions is the _______ business day following the trade date, known as ________. Examples: _________ securities, __________, and _________ securities settle this way.

Answer 64

first T+1 Corporate municipals government agency securities

Question 65

Settlement: Interdealer trades in _______ securities settle in federal funds. When are Federal funds available?

Answer 65

government Federal funds available represent payments that have same-day availability.

Question 66

Settlement: Interdealer trades in all other securities (besides ________ securities) settle in clearinghouse funds. The most common examples of clearinghouse funds are personal (or business) checks. When are clearinghouse funds available?

Answer 66

government Those take time to clear and are not considered immediately available funds.

Question 67

Settlement: Cash Settlement: In connection with a transaction for cash, delivery must be made at the office of the purchaser on the _______ of the transaction. Stocks or bonds sold for cash settlement must be available on the ______ for delivery to the buyer.

Answer 67

day spot

Question 68

Settlement: Cash Settlement: Cash trade settlement occurs no later than _______ ET if the trade is executed before 2:00 pm. If the trade occurs after 2:00 pm, settlement is due within _____ minutes.

Answer 68

2:30 pm ET 30 minutes

Question 69

Settlement: Seller's Option Contracts: Seller's option contracts are a form of settlement available to customers who want to sell securities but know they cannot ________ the physical securities in time for regular way settlement.

Answer 69

deliver

Question 70

Settlement: Seller's Option Contracts: A seller's option contract lets a customer lock in a _______ price for securities without having to make delivery on the first business day. Instead, the seller can settle the trade as specified in the contract. If the seller instead elects to settle earlier than originally specified, the trade can be settled on any date from the second business day through the contract date, provided the buyer is given a ______ notice.

Answer 70

selling one-day written

Question 71

Settlement: Buyer's Option Contracts: A buyer's option contract works the same way, with the ______ specifying when the settlement will take place. The exam does not ask why someone would do this; you only need to know what the terms mean.

Answer 71

buyer

Question 72

Settlement: When-Issued, As-Issued, and If-Issued Contracts (When-Issued Trades): Typically, new municipal bond issues are sold to investors before the bonds are issued and available for delivery. An investor is then given a _______ confirmation describing the bonds.

Answer 72

“when-issued” confirmation

Question 73

Settlement: When-Issued, As-Issued, and If-Issued Contracts (When-Issued Trades): The “When-Issued” confirmation does not include a total dollar amount or settlement date because, until the _______ is known, the accrued interest cannot be calculated to determine the _______. Once the bonds are issued, the investor receives a new confirmation stating the purchase price and settlement date.

Answer 73

settlement date total dollar amount

Question 74

Settlement: When-Issued, As-Issued, and If-Issued Contracts (When-Issued Trades): A When-Issued, As-Issued, and If-Issued Contract, transaction confirmation must include: - description of the ____ - the purchase _______ (dollar bond) - ________ (serial bond) - _______ date

Answer 74

security price yield trade

Question 75

Settlement: When-Issued, As-Issued, and If-Issued Contracts (When-Issued Trades): Because the settlement date is unknown, a “when-issued” confirmation for bonds cannot include ________. That means it will not show the total dollar amount due.

Answer 75

accrued interest

Question 76

Settlement: Regulation T specifies the date customers are required to _____ for purchase transactions.

Answer 76

pay The settlement date, is the opposite it’s, the date customers are requested to deliver payment or the securities involved in transactions.

Question 77

Settlement: Regulation T: Under Regulation T, payment is legally due ________ business days after settlement date. Failure to make payment on time can lead to an account freeze unless the broker-dealer has received an extension from its _______.

Answer 77

two business days designated examining authority (DEA)

Question 78

Summary of Settlement Rules: Regular way—Equity (including exercise of equity options): T+1 (1 business day) Regular way—Corporate and municipal bonds: T+1 (1 business day) Regular way—When trading options: T+1 (1 business day) Regular way—When trading or exercising nonequity options: T+1 (1 business day) Regular way—T-bills, T-notes, and T-bonds: T+1 (1 business day) Regular way—U.S. government agency: T+1 (1 business day) Seller's option: No sooner than T + ____ Cash settlement: _______ Regulation T: T + ____

Answer 78

• T+2 • Same Day • T+2 (2 business days after trade date) Assume a question is asking about the typical customer settlement terms, regular way, unless the question specifically mentions Regulation T.

Question 79

Settlement Rules: In addition, here is a hint on municipal when-issued settlements. A probable question will ask either what is not included or what is included on a when-issued confirmation. To discern the correct answer, remember SAT, which identifies what is not included: • • •

Answer 79

• Settlement Date • Accrued Interest • Total dollar amount due at settlement

Question 80

Settlement Rules: If a question asks when customer confirmations must be sent, the answer is no later than the _______ date. However, if the question asks when broker-to-broker confirmations must be sent, the answer is no later than the business day following the _____ date.

Answer 80

settlement date trade date (T+1)

Question 81

Settlement: Don't Know (DK) Notice: In an interdealer trade, each side electronically submits its version of the transaction to the _______. If one side does not recognize the other side's details of the transaction (e.g., the number of shares or the price is wrong, it will electronically __________ the trade.

Answer 81

Automated Confirmation Transaction Service (ACT) DK (don't know)

Question 82

Settlement: Don't Know (DK) Notice: DKs are used in interdealer trades for which one party to the transaction does not _______ the trade or, if it does, _______ with the terms of the trade as submitted by the other party. The term can also be used within a member firm when an order or wire room does not recognize the account number or other information on an _______. The exam is not likely to get into the procedures followed after the DK notice is sent.

Answer 82

recognize disagrees order ticket

Question 83

Settlement: Due Bills: If one of your customers buys a stock before the ex-dividend date, the customer is entitled to the dividend, interest, or rights. • However, if the trade is somehow mishandled and does not settle until after the record date, the seller will be paid the dividend in ______. In this case, your firm should send a due bill to the seller's firm stating, "Our customer is not due the dividend—kindly remit (send back)."

Answer 83

error Broker-dealers send due bills when the wrong party receives a dividend, interest, or rights from the issuer.

Question 84

Settlement: Trade Confirmation: SEC rules require that a confirmation must be given or sent to a customer _____ or ______ the completion of the transaction (the settlement date).

Answer 84

on or before

Question 85

Settlement: Uniform Practice Code (UPC) Rules: Good Deliverable Form: Good delivery describes the physical condition of, signatures on, attachments to, and denomination of the certificates involved in a securities transaction. Good delivery is typically a back-office consideration between buying and selling brokers. In any member-to-member transaction, the delivered securities must be accompanied by a properly executed uniform delivery ticket. Every issue has a transfer agent. The transfer agent is the final arbiter of whether a security meets the requirements of good delivery. Settlement: Good Deliverable Form: Overdelivery and Underdelivery: In settling customer sell transactions in which the securities delivery matches the exact number of shares or bonds sold, the first rule of good delivery is met. However, if the customer ________ or ________, the transaction is not good delivery.

Answer 85

overdelivers underdelivers

Question 86

Settlement: Uniform Practice Code (UPC) Rules: Good Deliverable Form: If the customer overdelivers or underdelivers, the transaction is not good delivery. This is an example of ________: A customer sells 300 shares and brings in one certificate for 325 shares.

Answer 86

Overdelivery

Question 87

Settlement: Uniform Practice Code (UPC) Rules: Good Deliverable Form: If the customer overdelivers or underdelivers, the transaction is not good delivery. This is an example of ________: A customer sells 100 shares and brings in one certificate for 80 shares.

Answer 87

Underdelivery

Question 88

Settlement: Uniform Practice Code (UPC) Rules: Partial Delivery: A member-to-member partial delivery is ________ under Uniform Practice Code Rules if the amount remaining to be delivered does not include an ______.

Answer 88

acceptable odd lot

Question 89

Settlement: Uniform Practice Code (UPC) Rules: Partial Delivery: Example: Delivering 200 shares to satisfy a 300-share sale would be ______ delivery.

Answer 89

good (the amount remaining is a round lot.)

Question 90

Settlement: Uniform Practice Code (UPC) Rules: Partial Delivery: Example: Delivering 250 shares to satisfy a 300-share sale would be ______ delivery.

Answer 90

Not Good (the amount remaining would be a mix of two round lots and an odd lot.)

Question 91

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: When one broker-dealer delivers stock certificates to another broker-dealer, the firm separates round lots and odd lots. Round-lot certificates are good delivery as long as they are in 100s or multiples of 100s. In simple terms, as long as the certificate ends in 00 (e.g., 400, 900, or 8,500), it meets the conditions of the Uniform Practice Code Rules .

Answer 91

Good Delivery Clearing Rule / [100-Share Uniform Units] Please pay attention to the good delivery clearing rule because is it highly tested.

Question 92

Settlement: Uniform Practice Code (UPC) Rules: __________: When one broker-dealer delivers stock certificates to another broker-dealer, the firm separates round lots and odd lots.

Answer 92

Good Delivery Clearing Rule / [100-Share Uniform Units] Please pay attention to the good delivery clearing rule because is it highly tested.

Question 93

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units] ____________: When one broker-dealer delivers stock certificates to another broker-dealer, the firm separates round lots and odd lots. When it comes to odd lots, members can make round-lot deliveries of them if the total of all of the the odd lots _____ to a single round lot.

Answer 93

add up (combine) Please pay attention to the good delivery clearing rule because is it highly tested.

Question 94

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Example: Using odd lots to make round lots: The trade is for 200 shares. If the firm delivers four certificates of 50 shares each. Is that is good delivery? Why? Or Why not?

Answer 94

Yes Because adding two of the certificates together equals 100 shares. That can be done twice to total 200 shares.

Question 95

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Example: Using odd lots to make round lots: If the firm delivers four certificates of one 70-share certificate, one 60-share certificate, one 40-share certificate, and one 30-share certificate. Is that is good delivery? Why? Or Why not?

Answer 95

Yes. Because adding together the 70 and the 30 to get 100. Then take the 60 and the 40 together to have the next 100.

Question 96

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: If the trade has an odd lot, any number of certificates adding up to that odd lot is acceptable. Example: Using odd lots to make round lots: If the firm delivers a trade for 67 shares can be a 50 plus a 17, or it can be a 25 plus a 30 plus a 12. Is that is good delivery? Why? Or Why not?

Answer 96

Yes it equals 100. Think of it this way: can you take the certificates and make piles of 100 shares? If the answer is yes, it is good delivery.

Question 97

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / Good Delivery for Bonds: The rules for good delivery are the same for corporate and municipal bonds. Delivery of bonds in ______ or _______ form should be made in denominations of $1,000 or $5,000.

Answer 97

coupon or bearer form

Question 98

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / Good Delivery for Bonds: The rules for good delivery are the same for corporate and municipal bonds. Delivery of bonds in ________ form are delivered in denominations of $_______ or multiples of $_______ but never larger than $_______. Municipal bonds may settle in bearer or registered form and be delivered in the denominations stated earlier.

Answer 98

fully registered form $1,000 $1,000 $100,000

Question 99

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Missing Coupons: If coupons are missing from a bond, it is not good delivery. If an issuer is in default on a coupon bond, all of the unpaid coupons must be _______ for it to be good delivery.

Answer 99

attached From a practical standpoint, there are few paper coupon bonds left because they have not been issued since the mid-1980s.

Question 100

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: If the trade has an odd lot, any number of certificates adding up to that odd lot is acceptable. Example: For a 300-share sale, the seller could deliver: A. one 300-share certificate, three 100-share certificates, six 50-share certificates, two 100-share certificates, one 60-share certificate, and one 40-share certificate B. three 60-share certificates and three 40-share certificates C. four 75-share certificates Which would not be good delivery?

Answer 100

C Think of it this way: can you take the certificates and make piles of 100 shares? If the answer is yes, it is good delivery. There is no way to get stacks of 100 shares if you only have certificates of 75 shares. Remember, the fact that 4 × 75 = 300 is irrelevant. The rule states that certificates of less than 100 shares can be used only if you can make separate piles of 100 each.

Question 101

Practice Question All of the following would be good delivery for 470 shares except A. two 100-share certificates and three 90-share certificates. B. four 100-share certificates and one 70-share certificate. C. eight 50-share certificates, one 40-share certificate, and one 30-share certificate. D. 47 10-share certificates.

Answer 101

Answer: A We want to know which of these does not follow the rule. Choice A has two 100-share certificates—that's great for 200 shares. We also have three 90-share certificates. How do we make two stacks of 100 plus an additional 70 shares for the odd lot? We can't. Yes, 3 × 90 = 270 (the remaining shares), but we need stacks of 100. With a 90-share certificate, you need a 10 to make 100, and we don't have that. Look at the other answer choices to see how they meet the rule. Choice B has four stacks of 100 and one stack of 70—perfect. Choice C has eight 50s. We take two of the 50s and have 100, and we can do that four times. Then we add the 40 and the 30, and we have our odd lot. Choice D has 47 certificates of 10 shares each. This is sort of like paying a $470 purchase with 47 $10 bills—the cashier doesn't like it, but it works. Here, we take 10 of the 10s and that is 100. We can do that four times. That leaves over seven 10-share certificates, which is our 70-share odd lot.

Question 102

Role of the NYSE Designated Market Maker (DMM): The DMMs are both agents and principals. On the NYSE floor, they can act in the following ways: A DMM on the NYSE is charged with maintaining a fair and orderly market. If the DMM wishes to SELL from inventory, it may not compete with a public order; as such, the DMM must sell at a ______ price than the _______.

Answer 102

lower current market asking price

Question 103

Role of the NYSE Designated Market Maker (DMM): The DMMs are both agents and principals. On the NYSE floor, they can act in the following ways: A DMM on the NYSE is charged with maintaining a fair and orderly market. If the DMM wishes to sell from inventory, it may not compete with a public order; as such, the DMM must PURCHASE shares of stock for inventory, it may only do so at a price that is _________ than the __________.

Answer 103

higher current market bid price

Question 104

Settlement: Consolidated Tape: The consolidated tape is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks. The price shown does not include _______ or other charges.

Answer 104

commissions

Question 105

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Failure to Deliver: The seller cannot be _______ as long as the fail to deliver exists. Fail to deliver occurs when the selling broker-dealer does not deliver the securities in good deliverable form. The buyer or the selling broker-dealer can _______ the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the _______ who failed to deliver.

Answer 105

paid buy-in (make into a round lot) seller

Question 106

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Stock Power: If the certificate is registered in your client's name, a _________ to the brokerage firm must appear on the reverse side of the certificate.

Answer 106

properly executed assignment ( also known as a stock power)

Question 107

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Direct Registration System (DRS): The Direct Registration System (DRS) provides a book-entry service. This means that the _____ keeps the records of ownership in their name with no certificates issued.

Answer 107

issuer

Question 108

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Direct Registration System (DRS): When there is a sale of securities in the account, the customer tells the ________ to deliver DIRECTLY to the broker-dealer and there are no hassles with signature guarantees or mutilated certificates.

Answer 108

Direct Registration System (DRS) Example: Using “Transfer and Ship” creates potential delivery issues because the customer will have to be sure to have everything in good deliverable form to the broker-dealer by T+1.

Question 109

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Direct Registration System (DRS): Holding a security in ________ means in the name of the brokerage firm, something the customer specifically does not want. So this would not be a good option for retail customers who are seeking anonymity as with using the DRS.

Answer 109

Street Name

Question 110

_______ literally means to reclaim or take back. The return by the receiving party of securities previously accepted for delivery or a demand by the delivering party for return of securities that have been delivered. It works for either party to the trade; the buyer or the seller when, AFTER delivery has been made, it is determined that something is incorrect. This differs from _______ in that it occurs at the EXACT TIME of delivery, not afterward.

Answer 110

Reclamation rejection

Question 111

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Direct Registration System (DRS): DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "_______" registration for customer securities. In this type, a stock is registered in an investor's name, but the ________ that issued the stock is the one that holds the security in book-entry form, instead of a broker-dealer.

Answer 111

street name Issuing company (its transfer agent)

Question 112

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Direct Registration System (DRS): ________ and _________ method is also known as institutions that want to pay only at settlement or at delivery. So this would not be a good option for retail customers who are seeking anonymity.

Answer 112

Delivery Versus Payment (DVP) and Receive Versus Payment (RVP)

Question 113

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Reclamation: Reclamation is available if a member inadvertently accepts a delivery on settlement date and ______ discovers that the securities were not in good deliverable form. The difference between reclamation and rejection is the timing. _______ happens at the moment of delivery; the delivery is not accepted by one of the parties. _________ only happens post-delivery.

Answer 113

later Rejection Reclamation

Question 114

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Reclamation: Reclamation is available if a member inadvertently accepts a delivery from another member as good and later discovers that the delivery should have been ________. Reclamation represents the right to return a security that had previously been ______.

Answer 114

rejected accepted

Question 115

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Reclamation: Reclamation is available if a member inadvertently accepts a delivery from another member as good and later discovers that the delivery should have been ________. • Bonds subject to an _______ call are NEVER subject to reclamation. The ONLY certificates the seller could have delivered are those subject to the call. • Unless identified at the EXACT time of trade, bonds subject to a ______ call are ALLOWED to be in reclamation.

Answer 115

in-whole call partial call

Question 116

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: A ______ is an assignment of a forthcoming distribution from the seller to the new owner. This is an instrument that illustrates the transfer of title to any dividend, interest, or right that pertains to securities that are contracted.

Answer 116

Due Bill

Question 117

Trade Reporting and Compliance Engine (TRACE): TRACE is the FINRA-approved trade reporting system for: A. corporate B. government agency C. Treasury securities trading in the over-the-counter (OTC) secondary market. While most corporate debt securities, ABS, and CMOs are TRACE-eligible, there are exclusions, such as debt of _______ governments, _______ instruments, and debt securities that are not ________ eligible.

Answer 117

foreign money market Depository Trust Company

Question 118

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Regular way delivery for municipal bonds is with the ______ attached. However, under MSRB Rule G-12, if, at the time of the trade, it is SPECIFIED that the delivery will be made ex-legal, it is a good delivery. In this case, the bond will typically be _______.

Answer 118

legal opinion stamped ex-legal

Question 119

Settlement: Uniform Practice Code (UPC) Rules: Good Delivery Clearing Rule / [100-Share Uniform Units]: Only a ______ is allowed to sign a stock or bond power to effect good delivery of securities sold from an account set up under the Uniform Transfer to Minors Act.

Answer 119

custodian

Question 120

Settlement: Reporting: The MSRB's Real-Time Reporting System (RTRS) requires municipal securities dealers to report information about most trades in municipal securities within ______ minutes. _______ reports transactions in government and corporate bonds.

Answer 120

15 minutes TRACE Before it was replaced in 2021, OATS reported on Nasdaq equities. ADF is a display-only facilty but not for municipal securities.

Question 121

Settlement: Confirmations: Confirmations from _______ to ______ must be sent no later than the next business day following the transaction (T+1).

Answer 121

broker-to-broker

Question 122

Markets: The ________ market is sometimes called the dumping ground for stocks that cannot trade on the organized markets for regulatory reasons or because they have such little investor interest that broker-dealers are unwilling to quote them.

Answer 122

grey market

Question 123

Markets: The ________ market is the trading of listed securities OTC.

Answer 123

third market

Question 124

Markets: The ________ market is institution-to-institution trading to avoid the use of broker-dealers.

Answer 124

fourth market

Question 125

Settlement: Reporting: Trade details must be reported to FINRA using the TRACE reporting system as soon as practical but not later than ____ minutes after execution. Once FINRA receives the trade information, it will be reported to the public immediately. The MSRB's Real-Time Transaction Reporting System (RTRS) also has the SAME _____ minute reporting time.

Answer 125

15 minutes 15 minute

Question 126

Settlement: Endorsement: _______ signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word and may be substituted with an ampersand (&) and the word company may be abbreviated. Example: Smith & Company, Smith & Co., or Smith and Company.

Answer 126

Corporate

Question 127

Settlement: Good Delivery: To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: 1. 2. 3. Insurance or letters of guarantee do not constitute good delivery

Answer 127

1. past due 2. currently due 3. subsequently due.