S57 Chapter 5 - Order Handling Rules

  1. When does the NMCES adjust open order prices?
    • Dividends, stock splits
    • Quotes are removed from the system
    • Typically prices are adjusted downward
    • Reverse stock splits, orders are cancelled
  2. What is SEC Rule 604 - the limit order display rule?
    • If a customer’s limit order improves the MM quote - the MM must immediately update the quote to reflect the customer’s order
    • If the customer’s limit order matches the MM quote (inside market)
    • The MM must immediately update its quote size to reflect the customer’s order (unless order is 10% or less of MM’s size)
  3. What is Regulation M - stabilization?
    • Stabilizing is prohibited unless to prevent a decline in a security’s market price.
    • Allows a syndicate to buy shares in the secondary market to prevent a price decline.
    • Only one syndicate member may enter a stabilizing bid
    • Market must be notified
    • Bid may not exceed public offering price but then it can be maintained at that level
    • Unlimited number of purchases and unlimited duration
  4. What are exceptions to the limit order rule?
    • Customer requests do not display
    • Order immediately executed
    • Order sent to another BD that complies with the display rule
    • Order sent to an ECN that complies with the ECN Alternative
    • Block size orders unless the customer requests they be displayed ($200,000 value or 10,000 shares)
    • Odd-lot orders
    • All or none orders
  5. What is the ECN Amendment
    • If a MM quotes a better market on an ECN than on Nasdaq, it must improve its Nasdaq quote
    • They can also utilize a qualifying ECN which:
    • 1. Communicates improvements to Nasdaq
    • 2. Permits access to orders to MMs and customers that aren’t part of that exchange
  6. What is the Manning rule?
    • If a MM accepts a limit order from a customer and then fills an order for their own account that would have satisfied the limit order, they must immediately fill the customer’s order for an equal or better price and for the same number of shares.
    • Immediately == within 60 seconds
  7. What are the exceptions to the Manning rule?
    • Orders from institutional accounts ($50M in assets)
    • Orders of 10,000 shares and at least $100,000
    • MM must provide annual disclosures to customers and must allow them to opt into the protection
    • Intermarket Sweep Orders (ISOs)
    • Other non MM divisions of a firm
    • Orders on a riskless principal basis
  8. What is a net price order?
    An order inclusive of markups. For instance, a limit bid for 10.10 net (inclusive of all costs) is entered as 10.00 limit bid
  9. What are the penalties for insider trading?
    • Criminal: $5M, 20 years in prison
    • Corporation: $25M
    • Civil: Disgorgement of profit and 3x damages
  10. What is trade shredding?
    A BD breaking up orders into smaller orders with the intent of maximizing a monetary amount.
  11. What is excluded by the 5% markup policy?
Securities that are sold by prospectus or offering circular (e.g. new issues and mutual fund shares)
  12. How is markup calculated on a proceeds transaction?
Calculated as if it were one trade done for cash.
  13. What is riskless principal
    • A dealer buys into inventory to fill pre-existing customer orders
    • When a customer is charged the same price as BD + a markup 
Markup is disclosed, trade is marked as riskless principal
    • Volume reported as 1 transaction
    • No approval required from the customer
  14. What are net transactions?
    • A dealer buys inventory to fill a customer order and the customer is charged a different price.
    • Net price paid by the customer is disclosed
    • Must disclose volume of both legs
    • Written consent needed on order-by-order basis for non institutional customers
    • Oral, written, or blanket permission required for institutional customers
  15. What is SEC Rule 605: Disclosure of Order Execution Information by Market Centers
    • Published monthly
    • Shows efficiency of executions, including effective spread (2x the difference between the actual trade price and prevailing midpoint)
  16. What is SEC Rule 606: Disclosure by BDs of routing information for Non-Directed Orders
    • Published quarterly
    • Shows market centers to which firms route orders
    • Shows nature of relationship with these market centers
Card Set
S57 Chapter 5 - Order Handling Rules
S57 Chapter 5 - Order Handling Rules