Series 7 Trading Markets Notes

Trading Markets

Trading Market Basics:

-The secondary market is divided into:

First Market: trading of exchange listed securities on that exchange

Second Market: trading of non-exchange listed securities OTC

Third Market: trading of exchange listed securities OTC. Lots of trading when the traditional exchanges are closed

Fourth Market: trading of securities between institutions OTC via ECNs

-There are exchanges that trade futures

-Trades of exchange listed issues are aggregated and reported through the Consolidated Tape. Tape A is NYSE, B is Amex, C is NASDAQ

-OTC equity securities are either OTCBB issues or Pink Sheet issues

-Most corporate bonds , and all munis, treasuries, and agency bonds trade OTC

-All new issues of secs are OTC. Once issue is sold to investors, it is then listed on an exchange in the first market

-Electronic Communication Networks (ECNs) accept orders from institutional customers and professional traders electronically on an agency basis only, and get a matching fee for each successful execution. Open 24 hours. All ECNs are owned by the NYSE or NASDAQ

-ECNs essentially bypass the trading floor, because the trading floor used to be an expensive place to trade

-ECNs must register with FINRA, and display its orders (once it reaches 5% of trading volume for the given security)

-Secondary Market: does not trade new issues, mutual funds, variable annuities, Gov saving bonds, DPPs

Secondary Market Characteristics

-The more active the trading volume, the more efficient the market

-The smaller the spreads, the more efficient the market

-The smaller the transaction costs, the more efficient the market

-Efficient markets = low marketability risk and low liquidity risk

-NYSE, AMEX, NASDAQ, US Gov Bonds are most efficient, in order

-OTC markets are the least efficient

Auction vs Negotiated Market

-Any first markets with a trading floor are auction markets (the NASDAQ is not)

-The second and third markets are negotiated markets. Meaning market makers post quotes and anyone who wishes to trade must contact the maker to negotiate price

-Fourth market/ECNs are neither auction nor negotiated, no auction, no negotiation

Dual Listings

-A security that is traded in more than one marketplace. A company can list on a regional exchange and then become part of the NYSE (once its big enough) as the NYSE allows companies to continue trading on their original exchanges

-There is no such thing as a “listing” in the 3rd and 4th markets!

Brokers and Dealers

-A broker is an agent, or middleman in a transaction, earns commission

-A dealer is a principal, or market maker in a transaction, earns spread

-OTC firms are “broker-dealers” because they do both

-OTC firms cannot be both an agent and principal in the same transaction!

Market Makers / Order Flow

-Market makers are allowed to make payments to retail member firms in return for the retail firm to route its customer orders to them

-AKA, the market maker is rebating part of the spread it earns, allowing retail firm to charge lower commissions

-SEC permits this because it lowers cost to customers

-Payments for order flow must be disclosed to customers on trade confirmations

Best Execution Rules

-SEC requires that retail member firms route their orders to the cheapest market

-If stock is dual listed, retail firm must send the order to the best priced market

-Can choose either market if pricing is the same

After Hours Trading

-Trades can be executed on exchange listed securities in the “after-hours” market

-This market is open 24hrs a day, and executes most trades when the exchanges are closed

-Comprised of 3rd market makers and ECNs

-Trading is very low volume, very volatile due to low volume, and wide spreads

Regulation NMS

-Regulation NMS requires all market centers to electronically link and provide automated execution at the best price of all markets within 1 second for orders that are executable

-Market centers cannot discriminate against customers

-Sets disclosure rules, requiring monthly reports on speed and quality of executions

-Broker-dealers must provide customers with reports on order routing and order flow

Regulation NMS: Trade Through Rule 611

-Trade through rule requires that any “fast market” (NYSE, NASDAQ) must either execute a trade within 1 second at the best price, or route that order to the market that is posting the better price (3rd market or ECN)

-AKA, prohibited from “trading through” another markets better priced quote

Regulation NMS: Market Execution Quality Reports Rule 605

-Rule 605 requires that market centers prepare, and make available to the public, monthly reports summarizing their order executions

-Data on: effective spreads, order execution, speed of execution, fill rates, prices

Regulation NMS: Broker-Dealer Order Routing Reports Rule 606

-Rule 606 requires broker-dealers report:

-the fact the firm received an order flow payment

-The identity of the market which the customers orders were routed

-Must notify customers annually of the availability of the information

-Rule only applies for orders that were “non-directed” meaning the customer did not specify which market to direct the order to

-Must provide quarterly report on:

-% of non-directed orders

-10 largest market makers whom non-directed orders were sent

-firms relationship with that market maker

-payment of order flow, if applicable from the order makers

Regulation NMS: Sub-Penny Quotes Rule 612

-Does not allow sub-penny orders to be entered for NMS stocks (NYSE, AMEX, NASDAQ)

-But, trade executions are permitted in sub-penny increments, since it makes markets more competitive

Directed Trades

-Must follow the customers instructions if they specify a trading venue for the order

-Trading venue must either fill the order at the best price, or re-route it to the best price market

-Insures customer will get the best price, regardless of where the order is actually send

Order Ticket Information:

-Order ticket must be completed prior to sale and include an array of information

-Does not include commission amount, or accrued interest for bond trades

-An order placed All or None (AON) is to be filled in its entirety, if it cannot be, then the trader is to attempt execution at a later time

-Order placed Fill or Kill (FOK) is to be filled in its entirety, if it cannot, then it is cancelled

-An order placed Immediate or Cancel (IOC) is to be filled in part or in full on one attempt. No further executions attempted, any unfulfilled is cancelled

-Either / Or orders specify either 2 prices to buy or 2 prices to sell. Used by technical analysts to catch trends or breakouts

-At the Open is to be filled at the opening price, or cancelled. At the Close, is at the closing price or cancelled

-Long Sale: order is market long if the customer is delivering the securities on settlement. Typically used for options, rights/warrants, converts

-Short Sale: must be marked sell long or sell short. Long sale = stock is owned, shares delivered on settlement date. Short sale = stock is not owned, borrowed shares will be delivered on settlement date. Subject to Regulation SHO

-Cancel/Rebill is when there is an error with the trade due to account info needing to be changed. Must be approved in writing

Order Types

Buy Limit Order: specifies a maximum price which customer will pay. Must be filled at the limit price or lower

Sell Limit Order: specifies a minimum price at which the customer will sell. Must be filled at the limit price or higher

Stop Orders: specifies a stop price to which the market must move. If market moves through, turns into a market order to buy or sell

-Used for stop loss, on long or short positions

-Can trigger acceleration in price increase/decrease if a lot of stop orders are present in the market around a similar price

Sell Stop Order: used as a stop loss on a long position, or to protect a profit on a long position. Placed at a price lower than market, and sells if price falls below stop order

Buy Stop Order: used as a stop loss on short positions, or to protect short profits. Placed at a price higher than the market, and trigger if the price rises to hit the stop price

Sell Stop Limit Order: same as above, but order is only executed at the limit price or higher. So if price keeps falling, the order may never be filled

Buy Stop Limit Order: same as above, but only executed at limit price or lower

Support & Resistance

Read here to learn about these:

I already knew them well enough to not take notes on them, sorry!

Stop vs Limit

Limit orders guarantee price but not execution

Stop orders guarantee execution but not price

NYSE Trading

Listing Requirements

NYSE has two listing standards:

-A new company that is listing its first issue of shares

-An existing company that is moving its listing from a different market

For an existing move, the standards include:

-2,200 stockholders

-1,100,000 shares outstanding

-$100M of market value

-100,000 average monthly trading volumes

NYSE Market Participants

Specialist: called a Designated Market Maker. Makes a market, and also acts as a broker’s broker

Floor Broker: represents the retail member firm, manually handles orders on the floor that cannot be executed through the NYSE’s automatic trading system

$2 Broker: assists floor brokers in executing difficult trades during times of order overflow

Competitive Trader: an exchange member that is only permitted to trade for his own account (this isn’t relevant in today’s time)

How the NYSE Functions

Orders are only sent to the trading floor for round lot units (multiples of 100)

-First order to reach floor has priority

-Larger order has precedence if they reach floor at the same time and same price

-Market orders have priority over all others

-Highest bid and lowest ask have precedence – price most market orders will be filled

Specialist / Designated Market Maker

Does not deal with the public – deals with floor brokers, $2 brokers, and competitive traders

Has 2 primary functions:

-Will buy and sell for his own inventory account (market maker) when there are no other participants. Buyer/seller of last resort

-Broker’s broker: acts as a brokerage for other broker firms whom cannot immediately execute

Earns spread as a market maker, earns commission for trades executed from his book

Obligated to make fair and orderly markets in the given stock. Must do so in a way that dampens volatility

Obligated to make a continuous market and trade off his own books if there are not other participants

Must not trade on own books if there is active trading between retail customers

DMM: Book of Open Orders

DMM only accepts day orders on his book

Orders from the book are filled on a FIFO basis

Member firms must feed orders on a daily basis if they want an order to last longer than 1 day

Orders cancelled at the end of day if not filled

Cannot sell or buy for his own account at a higher or lower price until all orders at the given price have been filled

DMM: Order Filling Procedures

The DMMs quote represents the next orders to be filled from his book

Will fill orders at the Bid/Ask quote from its book, but can also fill them from its own account for a lower price/higher if the think the prices are going up/down

All DMM quote are firm – good for the order size shown

DMM also acts as the odd lot dealer, for trades less than 100 shares

DMM: Stopping Stock

Stopping stock means the DMM is guaranteeing a price to the floor brokers for a given period of time, ideally to give them a better price

Allows floor broker to shop around to see if he can get a better price

Only permitted for public orders for customers. Prohibited for orders for member firms own accounts

Super Display Book

Super Display Book is the current automated trading system used by the NYSE

It accepts round lot trades, which are electronically routed directly to the DMM’s post for execution

System is faster and cheaper than manual trading by floor brokers

System accepts Market and Limit orders, up to 3M shares for limit, and 1M for market

Does not accept Stop Orders, but member firms can do them on their internal systems and then feed them to the exchange if they are triggered

Only takes day orders, but again firms can reroute using their own systems

Cannot accept market-not held orders, must be done manually by floor broker

Consolidated Tape

Network Tape A records trades of all NYSE listed issues, regardless of where trade took place

Trades must be reported within 10 seconds of execution, during regular market hours

Reading the tape:

-Simple price means 100 shares

-s prior to price means lots of 100…3s = 300, 30s = 3,000

-Above 10,000 is actual shares, disregard the s…100,000s = 100,000

Consolidated Tape: Cabinet Stock

A cabinet stock is one that trades in round lots of 10 instead of 100

Either very thinly traded or very expensive stocks

Designated on the tape by symbol s/s

Circuit Breaker Rules

If the S&P500 moves down by 7% or more from the prior days closing price, the listed equities market will be shut down for 15 minutes

After reopening, if the index falls by a total of 13% or more from the prior close, it will close for another 15 minutes. Goal is to eliminate domino effect

7% & 13% must haven before 3:25PM or markets will stay open until close at 4pm

After reopening again, if the index falls by 20%, the markets will close until the next day

Non-Regulatory Trading Halts

A non-regulatory trading halt is one that is imposed by the exchange itself, usually at opening due to an extreme order imbalance

This effects only that exchange – other exchanges and 3rd MM’s and ECN’s can still trade the stock

Must be regulatory halt (imposed by SEC) for all markets to halt

Block Transactions

Blocks too large for Super Display Book execution are usually “Block Positioned”

When a member firm does this, it buys the block into its own inventory as a 3rd market maker, and then sells the position in smaller units on the floor


Tender Offers

Short Tender Rule: If there is a tender offer for stock by an issuer, only people who are net long in the stock can tender

Is essentially a corporation doing a stock buyback, to reduce shares outstanding

The stock owner does not have to tender, but has the option to

Corp must set a tender price that is attractive enough for shareholders – but does not have to accept all tenders, meaning a shareholder who tenders may not actually get paid if the tender offer is oversubscribed, or undersubscribed

Regulation SHO

SEC rule covering short sales of equity securities – applied to all traded common stocks, whether exchange traded or OTC

Rule has 4 components:

-Ever order ticket must be marked “long sale” or “short sale”

-Before execution, broker must locate the securities to be borrowed and determine if they can be delivered by settlement

-If a stock falls by 10% or more in a trading day, it can only be shorted by and “up-bid” the remainder of the day, AND the whole next trading day. This stops overshorting in a declining market. Only applied to NYSE, AMEX, NASDAQ

-Hard to borrow securities are put on a threshold list – shares of threshold stocks that are shorted must be bought-in no later than 10 days from settlement (+3 days for regular way settlement)

“Up-Bid” rule means the stock can only be sold short once the market is moving back upwards

Naked Short Selling is shorting without borrowing the underlying, and then delivering them on settlement date

NASDAQ / OTC Markets

Type of Securities Traded

All new issues (primary offerings) are sold in the OTC market, and then they trade on the secondary market

OTC market is comprised of the 2nd, 3rd, and 4th markets as described above

OTC market is a negotiated market

About 6,000 companies trade OTC vs the 3,000 on the NASDAQ and 2,800 on NYSE

OTC markets do not have listing standards, exchanges do

FINRA regulates the OTC market

Market Participants

OTC trades are effected by broker-dealers

May be multiple market makers for each OTC security

OTC trading desk: either sells from own book if the firm is a dealer in that security, or searches for the best price in the market aka acting as a broker

NASDAQ Market Makers

NYSE has one DMM per stock on the trading floor, who makes a continuous market in that stock

NASDAQ uses a system of competing market makers, might be 10 or so MMs at any given time, all competing to provide the best price. The competition ensures that there is always a market maker willing to trade – although they are not forced to make a market as the NYSE DMM is

NASDAQ Overview

Automated trading system is just called the “System” but used to be called “Single Book” WHICH MIGHT APPEAR ON THE EXAM

System displays dealer bid/ask quotes and all customer limit orders above and below the mkt

Executable orders are automatically matched to the best price and filled – called “locked-in trades” because of the automated execution

NASDAQ listed issues are placed in one of two tiers:

-Upper Tier: NASDAQ Global Market

-Lower Tier: NASDAQ Capital Markets


Level 1 shows the best available market for each stock

The best market is the “inside market” or NBBO (National Best Bid and Offer)

Intended for use by registered representatives


Level 2 shows the bid/ask quotes with sizes of all market makers

Quotes are firm – no nominal quotes permitted

Intended for use by trading desks

NASDAQ Orders / Quotes / Features

Orders are filled on a FIFO basis

Maximum order size is 999,999 shares

Size of quote is reduced as execution occurs

Accepts market and limit orders, DOES NOT take stop orders

Does not take orders requiring human judgement such as Market – Not Held

Minimum order size is 100 – all quotes are firm

Operates same as NYSE: 9:30am to 4pm

Also offers a before and after hours trading session – but volume is thin

OATS – Order Audit Trail System

Electronically captures order info for all US equities, no more paper order tickets

OATS records are required for all US equities markets (including NYSE, OTC, etc.)

ACT (Automated Comparison of Transactions):

ACT receives reports of completed trades and sends to the contra-party for comparison on a real-time basis. It reports the trade to the tape and it reports the trade to the clearing corporation for settlement.

Prices used in trade reports to the NASDAQ tape (or any tape for that matter) do not show, and therefore exclude, any commission or mark-up or mark-down, charged.

ECNs – Quotes / Trade Reports

ECNs can choose to link to an exchange to display their quotes, or remain unlinked

FINRA has the ADF which displays quotes of unlinked ECNs

Any trades resulting from ADF (unlinked) are reported through a system called TRACS which reports the trade the appropriate Network Tape

Dark Pools

An evolution of ECNs, dark pools are operated by large broker-dealers (Goldman, etc.)

Dark pools allow institutions to buy or sell very large blocks without displaying their orders in the ADF or any other display system. Hides the trade size and identity of the organization. Used to avoid a single big trade moving the market itself

Trade still must be reported to the appropriate tape


Stocks that are too small to be NASDAQ listed are quoted in the OTCBB, run by FINRA. Pink OTC Markets is a competitor, and is privately held

FINRA is trying to shut the OTCBB because Pink OTC Markets is fucking them up, but the SEC has now given permission for this to happen yet

Pink Sheets

Pink Sheet stocks are mainly penny stocks, too small for NASDAQ, bankrupt companies, or companies that are not current in SEC filings

Do not show corp, muni, or gov bonds

Only shows dealer quotes – does not show trades as they occur. Trade reports are made via the ORF run by the ACT

The Pink Sheet market is fairly illiquid, and the timeliness of quotes is uknown

To find the best market in a pink sheet issue, the trader must shop around

FINRA requires 3 competitive quotes be obtained to find the best market before a trader can trade in a certain stock

NASDAQ is firm only quotes, Pink Sheet is a fuck ton of other types that are probably irrelevant

Functions of OTC Traders

Handle buy and sell orders for customers as a broker essentially

Handle buy and sell orders on principal basis, buying and selling a firms inventory. Charge spread

Give quotes to customers

Set bid-ask spreads

Agency Transactions

Firm acts as a broker matching a customer order to the best avail mkt

As a broker, the firm is acting as agent in the transaction

Principal Transactions

Firm acts as a dealer, buying or selling a customers inventory

As a dealer, firm is the principal, aka market maker. Earns spread

Position Trading: When a broker-dealer trades on its own inventory to profit

Riskless Principal Transaction: when dealer receives a buy order for a stock it doesn’t have in inventory. Then goes out and buys it so it can immediately sell. Markup price from what they paid

Options and Other Markets

Listed Options Trading

Listed options are traded on the CBOE, AMEX, PHLX, and PSE (probably irrelevant)

CBOE: Order Book Official

Is an exchange employee that maintains the book of public orders that are away from the current market

Earns a commission for executing these orders

DOES NOT make a market!!


Market makers and Registered Options Traders can trade on their own account

Options trading floor agency traders: order book officials, and floor brokers

Options trading floor principal traders: market makers, DMMs (ROTs), competitive traders

Has an automated trading system that bypasses floor traders

Spread Priority Rule

One-on-one orders (2 options positions, one against the other) has priority on the trading floor over single orders

Spread / Straddle Orders

Purchases of options contracts are made at the MMs ask quote, sales of options contracts are made at the MMs bid quote


If floor broker has two different customers to buy/sell the same contract, broker must first attempt to execute on the trading floor. If he can’t, he must cross the trades himself

Trading Halts

If a certain stock halts trading for any reason, the options trading halts as well

Consolidated Quotation Service

Shows bid/ask quotes for NYSE issues, no matter who is making the market

Open from 9-630pm, allowing for before/after trading

Customer Disclosure and Settlement Rules

OTC: Confirmation Disclosure

Must show accrued interest for bond transactions!

Must show commission and spread charges in agency and principal trades

Options: Confirmation Disclosure

Date/settlement, # of contracts bought/sold, price, commission charges, time of trade, name of party

Same Day Settlement

Cash settlement is same day settlement, before 230pm

Next Day Settlement

US Gov Securities and Options settle regular way, the next business day

Trades of listed stocks, corp bonds, and munis settle regular way 3 business days after the trade date, through the NSCC – broker dealer or bank

Gov securities trades settle through the GSCC in Fed Funds

Options trades settle through the OCC, either broker-dealer or a bank

When, As, and If

WAII trades are used for securities that start trading prior to certificates being physically issued

Settlement date is not known, accrued interest is not known

Ex-Date: Cash Dividend – Regular Way

Ex-dividend date for cash dividends is set at 2 days prior to the record date

As of the ex-date, any purchase in a regular way trade will not receive the dividend because they will settle after the record date

On the ex-date, the price of the stock is reduced for the dividend

Last Day to Buy and get Dividend

If a customer wants to buy stock and receive dividend, must buy in a regular way trade at least 3 business days prior to the record date, which is the same as buying before the ex-date

First Day to Sell and get Dividend

Must sell in a regular way trade no earlier than 2 business days prior to the Record Date, which is the same as selling no earlier than the ex-date.

Ex-Date: Cash Settlement

If a customer buys stock in a cash settlement, he or she can buy up to, and including the Record Date, and receive the dividend. The amount of the dividend is added back to the stock price since the customer will receive the distribution.

Ex-date for stock dividends, splits, and rights is set at the business day after the payable date. The payable date is a month after the record date.

Stock splits have no effect on preferred stock holders

Ex-Date Summary

  • To buy a stock and receive a dividend, the stock must be purchased:
    • Prior to the ex-date in a regular way trade;
    • No later than the record date in a cash trade.

Accrued Interest

Interest accrues up to, but not including the settlement date

Gov bond accrued interest is actual/actual

Agency, corp, munis accrue interest 30/360

DRS – Direct Registration System

Does away with printed stock certificates for stock issues, rather, it is a “book entry” registration system.

FINRA 5% Policy

  • The FINRA 5% Policy applies to both OTC and exchange transactions (secondary market).
  • It states that commissions charged in agency transactions; and mark-ups and mark-downs charged in principal transactions; should be fair and reasonable, with 5% as a guide, not a rule.
  • Applies to trades in the 1-4th secondary markets

**Practice Questions Notes**

Trading Market Basics

-Futures contracts are traded on the CBOT

-CQS displays quotes from all market centers/exchanges

-NASDAQ listed securities quotes are found on the UQDF

-Third market is listed securities traded OTC

-ECNs do not trade OTC stocks, only listed!!

-Closed end funds and REITs are actively traded on the secondary market

-Regulation NMS requires market centers to accept automated executions that do not discriminate against any class of users of their systems

-Rule 605 requires each market center to prepare monthly electronic reports about quality, speed, and spreads of executions. Don’t need to report trading volumes!

-Rule 606 is for non-directed orders only! Both listed and NASDAQ

-Rule 612 – can only be posted or quoted in penny increments, but can be executed in penny-increments

-An order ticket does not have price of transaction info, or amount of accrued interest!

-An immediate or cancel order requires the trader to execute the order in part or in full in one attempt, with the unexecuted portion of the order (if any) canceled. No additional execution attempts are allowed. The customer must accept the partial fill of this order; with the remaining 100 shares that are unfilled canceled.

-Immediate or cancel must be filled in entirety OR in part at the immediate time. Any unfilled are cancelled, there is no attempt at re-execution

-Market – at the open must be executed the same day it is placed or it is cancelled, cannot be executed the next morning

-Trade must actually be executed for it to be considered long, unexecuted options, warrants rights, etc. do not qualify as long until order given to exercise

-Sell limit order is for rising markets, to sell at or above limit price

-Sell stop order will be elected at the stop price or lower, and executed at the next possible price once triggered

-Buy stop is to buy at the market price if the market rises to the trigger

-Sell stop limit is to sell at the market or higher once triggered. Limit means or higher, no limit means at the next available price

-Sell stop limit = sell once a certain price is hit, but sell higher than the specified price

-OBLOSS is falling markets!! loss is like falling

-OSLOBS is rising markets!! lobs – lobbing a pitch up, aka rising

-Limit orders guarantee price but not execution!! Stop orders guarantee execution but not price!

NYSE Trading

-Registered reps do not trade on the NYSE floor

-Bid/ask are never set by floor officials, always set by market participants

-Specialists can trade for their own account, floor brokers cannot!

-Specialists/DMMs handle odd-lot orders

-Stopping stock is only for public orders

-Consolidated Tape reports all exchanges, regional, and OTC

-Third market makers must report each trade within 10 seconds

-Block trades on NYSE too large for Super Display Book are routed to third market makers who effect the transaction on a principal basis

-A block trade is a minimum of 10,000 shares

-Regulation SHO is 10% drop or more must be up bid to short


-Mutual funds and variable annuities are not traded OTC

-Market makers trade OTC, not DMMs or any of that crap

-Quotes shown in the NASDAQ single book are firm and 2-sided

-Stop orders and not held cant be placed on the NASDAQ

-Everything is entered into OATS

-OATS takes in orders for NASDAQ, ACT matches and reports completed trades

-Trade prices on the tape do not show commissions!!

-Trades of NASDAQ securities executed on unlinked ECNs are reported by TRACS

-Dark pools are regulated

-OTCBB includes quotes for non-NASDAQ stocks, does not include any listed stocks

-Pink Sheets do not show completed trades as they occur

-Last sale reports are available for trades of Eurodollar bonds, not stocks or munis

-Last sale information is available for OTC, listed, and munis

-OTC traders don’t perform clerical duties (handled by clerks)

-cross is same stock, same time, same price to two different customers. Broker crosses and charges reasonable fee

-PTC firm must stay open during the hours the market is open, and must execute for customers before its own book

-Broker-dealer cannot execute a deal for itself that competes with a customer order. AKA if a customer places a buy order at 20, it cant place a buy at 19.50 and then sell to the customer at 20

Options and Other Markets

-NASDAQ does not trade listed options

-A CBOE floor broker CANNOT hold an inventory of securities, and can accept all orders. Executes all immediate transactions

-CBOE market maker trades on his own account and DOES NOT hold a book of public orders

-Order Book Official holds and executes orders that are away from the market

-CQS shows quotes from all market makers in the specific issue

Customer Disclosure and Settlement Rules

-In an agency transaction, commission must be disclosed on a customer confirmation

-Munis and listed stocks take 3 days to settle, options, tbills tbonds are next day



These notes are formatted a little bit better, but only cover a portion of the above:

Secondary Trading Market

  1. First Market
    1. Trading listed securities on exchanges
  2. Second Market
    1. OTC trading of unlisted securities
      1. OTCBB and Pink Sheets: equities
        1. Mostly penny stocks that don’t meet listing standards
        2. No listing standards
  3. Third Market
    1. OTC trading of exchange listed securities by third market makers
    2. CQS is the system that links the third market makers to the NYSE
      1. Shows all market makers quotes – able to find best price
      2. No NASDAQ stocks!! Just B/A for NYSE, AMEX, OTCBB, Pinks
      3. Open 9am to 630pm ET
    3. Best execution rule: must route orders to the best priced market
    4. Payment for order flow
      1. Allows market makers to kick spread back to broker-dealers in return for their business
      2. Ultimately reduces cost, through increased competition
      3. Rules regarding order flow:
        1. Must be disclosed on customers confirmation!!
        2. Rule 606: broker-dealers must do a quarterly report on their order routing. Percentages of orders that were routed to each exchange
        3. On customer request: must give customer detail of their prior 6 months of orders: where routed, exchange, if payment for order flow was accepted
  4. Fourth Market
    1. Trades take place directly between large institutional firms without any broker-dealers. Matched by ECN
    2. Instinet – very first ECN (electronic communications network)
    3. Island ECN
    4. Archipelago ECN
    5. All trade on an Agency basis, the ECN isn’t trading their own book and doesn’t hold any inventory

Trade-Through Rule

NYSE, AMEX, NASDAQ = national market stocks

These national markets must all electronically link and be able to access each other’s quotes in one second

If a market gets a marketable order (can be filled immediately) it must be filled in one second, at the best price shown in all markets

Part of Regulation NMS

BATS – relatively new 4th MM firm (Better alternative trading system)


  1. Specialist / DMM (is really a person from a member firm I think??)
    1. On the NYSE floor
    2. One DMM per stock
    3. Specialist has a positive obligation: buyer of last resort. Specialist must make a market if there are no buyers
      1. Assured of getting a fill if you send an order to them b/c of this
    4. Has a book open order with a buy and sell side
    5. 14.95-14.98 (4×7) is worst case pricing a customer will get

Circuit breaker rule: if S&P 500

      1. Drops 7%, trading is halted for 15 mins
      2. After re-open, if it drops 13%, another 15-min halt
      3. After 20% drop, markets will close

(7 or 8 questions here below)

OBL – Open buy limit order: placed below current market, filled when mkt drops

OSL – Open sell limit order: placed above market, filled when hits higher mkt price

OSS – Open sell stop: stop loss on a long position, sell below market

OBS – Open buy stop: stop loss for shorts, sell above market

OBLOSS are set below the market

OSLOBS are set above the market

Limit orders guarantee price, but not execution

Stop orders guarantee execution, but not price (trade at next mkt price once triggered)

Which orders are reduced on ex-date for cash dividends?


(DNR means do not reduce on ex-date)

Regulation SHO

Mark order ticket to sell “long” or “short”

Only mark long if:

the customer owns the stock and will deliver on settlement

Owns convertibles and gives irrevocable instructions to convert

Owns call, right, warrant and gives right to exercise

Mark short if:

You can locate the shares to be borrowed