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  1. NMS
    National Market System
  2. Nasdaq listing levels
    • Nasdaq Global Select Market
    • Nasdaq Global Market
    • Nasdaq Capital Market
  3. NASDAQ trades:
    equities, preferreds, rights, warrants, corps, munis, us and agency debt, money market intsturments, bank and insurance co issues, ADRS, No OPTIONs
  4. New issues often IPO as OTC, and then are listed on an exchange
  5. Equity and equity equivalent (convertible bonds) are divided into three classes depending on where they trade
    • NASDAQ stock market (NMS) - two sub-classes: Nasdaq Global market about 3000 issues, Nasdaq Capital Market, about 500 issues
    • OTC BB - owned by FINRA, only dissemination of quotes
    • Pinksheet - competitor to OTCBB
  6. FINRA is the market regulator
  7. Corporate bonds are non-exempt, regulated by FINRA, NASDAQ has no electronic trading of corp bonds, trade reporting IS electronic
  8. Gov/agency bonds are regulated
    by Federal Reserve
  9. Muni bonds are regulated by
    Municipal Securities Rulemaking Board (MSRB)
  10. Nasdaq Listing and Delisting Rules - ineligible securities for listing
    options, non-convertible corp bonds, gov bonds, agency and muni's
  11. NASDAQ 3 levels, 2 for NGM and 1 for NCM
  12. Nasdaq tiers of listing
    • NGS - Nasdaq global select
    • NGM - Nasdaq global market
    • NCM - Nasdaq capital market
  13. Initial listing standards are higher than continuing (maintenance) standards
    Delisting occurs if company violates continuing standards
    There are NO Debt/equity or Earning/share requirements
  14. NGS and NGM initial stds include minimum:
    revenues and total assetsnumber of outstanding shares (1,100,000)market capshare price (> $4 bid)shareholders (> 400)market makers (3 or 4)
  15. NCM initial listing standards minimum:
    • outstanding shares > 1,000,000
    • market cap.
    • share price (> $4 bid)
    • sharesholders >300
    • market makers 3 or more
  16. listing and continuation on NGS, NGM or NCM requires corp goveranance to include:
    • outside independent members of the board
    • audit committee
    • annual shareholder meetings and proxy solicitation
    • annual and quarterly financial reporting
    • shareholders must have voting rights
    • code of conduct that includes conflict of interest section
  17. NASDAQ can suspend or delist if:
    • bankruptcy is filed
    • independent accountants issue a disclaimer of opinion on financial statements
    • of if the company is deemed to have engaged in fraudulent or manipulative practices
  18. Trading halt for
    pending corporate news, cmpany must first notify NASDAQ marketwatch group with the news.
  19. NASDAQ trading halts
    • usually for 30 minutes after news is disseminated
    • company is blacked out with HALT and letter T
    • T.1 - news in pending
    • T.2 - news is released
    • T.3 - 2 times - quote display time and 5 minutes later, trade begin time, the 5 minute window
  20. Who can trade in NASDAQ during halt
    no FINRA members, even overseas
  21. NASDAQ levels I, II and III
    • I - used by brokers, only shows NBBO and size
    • II - used by trading desks to show all market makers, quotes and sizes
    • III - used by market makers to show all level II shows and enter quotes and sizes
  22. if your brokerage fills order from another firm's inventory it acts as an
    agent and discloses the commission
  23. if your brokerage fills a customer order from its own inventory it acts as a
    principal, and discloses the mark up
  24. When is markup required to be disclosed?
    • - if trade was done on Nasdaq system, disclose
    • - if trade was done on OTC on principal basis (even on a Nasdaq issue), markup must be disclosed
    • - if PRINCIPAL trade was done on OTC or pinksheets of non-Nasdaq or NYSE issue, mark up NOT disclosed
    • All NYSE trades are agency and therefore COMMISSON is disclosed
  25. Quote types:
    • Firm - good for stated size
    • Subject - quote good if confirmed, just an approximate price
    • Nominal  - not really a quote, just a guess
    • Workout - price will still have to be worked out by the dealer
    • Bid or Offer wanted - dealer requesting bid or ask
    • On OTCBB - any of these are valid, BUT ON NASDAQ - ONLY FIRM 2-SIDED QUOTES
  26. Long/Short Position - Principal
    taking a long or short position for the firms inventory
  27. position trading - Principal
    selling a security directly out of firm's inventory to customer with markup

    buying a security directly from customer to inventory and taking a mark down
  28. Riskless Or Simultaneous Trade - Principal
    performing a buy of stock you already have customer order to buy, so you turn around and sell to customer, or same for a sell
  29. Arbitrage trade - Principal
    buy and sell or same or equivalent security to lock in price differential
  30. Crossing - Agency trade
    to buy from one customer and sell to another, must be effected inside the market
  31. Proceeds transactions (Agency)
    customer directs broker to sell one security and use the proceeds to purchase another one

    Two commissions are earned, since two transactions
  32. FINRA prohibits a firm from acting as both a principal and agent in the same transaction
    one or the other, but not both (commission and mark up) can be earned on same transaction
  33. Market maker startup rules
    • FINRA sets rules
    • - must have minimum net capital
    • - if not already a market maker, must file written request, once FINRA approves, FINRA tells NASDAQ and NASDAQ tells market maker
    • - if already a market marker, can do same day registration for additional issues it wants to trade
  34. Market maker termination rules
    • - registration is termed if no quotes for 5 business days
    • NASDAQ terminates the registration
  35. NASDAQ market maker must maintain firm 2 sided quotes during market hours, 930 - 400

    If MM chooses to stay open during pre and aftermarket hours (4 AM - 930 AM, 4 pm - 8 PM), must maintain 2 sided firm quotes
    firm quotes are for minimum of 100 shares, if no size is given, it is for 100 shares
  36. Quotes must be "reasonably related to market and competitive"

    All quotes must be bona fide and trade data must be accurate
  37. no automated quote updating to keep quote from inside the market

    • can use automated updates to:
    • - update quote if exeuction partially fills quote size
    • - relfects receipt, execution or cancellation of customer limit order
    • - is to assure the market maker maintains teh same bid/ask quote as shown on another trading system (mirroring)
  38. Market makers are prohibited from entering quotes that lock or cross the market
  39. locked market
    inside bid and ask are the same
  40. crossed market
    inside bid is above inside ask
  41. NASDAQ opening procedure "Trade or Move" has been replace by "Opening Cross"
    • Opening Cross
    • starting at 4 AM, market makers enter regular orders and OO (On Open) orders, at 925, the quotes "go live", at 9:28, if there is an order imbalance, IO (imbalance only) orders are entered to cure the imbalance, the opening price is set to clear the order imbalance, at 930, the opening cross is performed.
  42. NASDAQ closing cross
    at 3:50, MOC orders are frozen, IO orders are accepted up until 4 pm, a price is determined to match up the orders.

    Post closing cross at 430. 

    there are 3 intraday crosses for institutional orders - are anonymous and cover NASDAQ 100 and S&P 500 issues
  43. NASDAQ trade reporting
    8 AM - 8 PM, done through ACT - Automated Confirmation of Transaction system - done within 10 seconds, not running in early pre-market, 4 AM to 8 AM
  44. withdrawing quote
    only with NASDAQ permission only up to 5 days, excused withdrawal based on legal erquirements, equipemnt problems, vacations and religious and legal holidays.  also, if there was a clearing agreement problem, it can be an excused withdrawal
  45. once withdrawn from NASDAQ, cannot return for 20 business days,  CQS only requires 1 day
    NASDAQ is much tougher than CQS

    if issues is delisted from NASDAQ, market maker can still make a market in teh issue in teh OTCBB
  46. NASDAQ market makers are not obligated to accept LIMIT orders
  47. Nasdaq order types
    • Day
    • GTC - cancelled after 1 year if nor filled
    • IOC
    • MQ - minimum quantity IOC
    • VWAP - volume weighted average price
    • Primary Peg - buy order that tracks inside bid, or sell order that tracks inside ask - only regular session
    • Market Peg - buy order tracks insdie ask minus $0.01; or sell order tracks the inside bid plus an increment - only regular session
    • Pegged Capped - has a range that once it hits that limit of the range, it becomes a limit order at the cap price - only regular session
    • Discretionary - a discretionary order is displayed at one price, but there is a second price 0.99 above displayed bid or 0.99 below the displayed ask.  This passive discretionary price is only is active when a market order comes in and will execute against eh display price.  an incoming limit order is within the discretinary rage, executes at the limit price

    AON - All or nothing - PROHIBITED

    Minimum Acceptable Quantity - PROHIBITED, MQ orders are okay and are filled if the size displayed is sufficient to fill the entire order adn part of an IOC order

    Limit orders may be partially filled

  48. VWAP orders, large ones may move the market, other rules on NASDAQ:
    - member accepting the VWAP order must disclose in writing to customer that it may use hedging and positioning orders when filling the order.  customer must sign disclosure.

    Market maker can continue to make a market in the security as long as information barriers are in place.
  49. Market hours orders:  930 to 4
    entered as Market Day or Market GTC
  50. system hours orders between 4 AM and 8 PM
    entered as System Day or System GTC
  51. NASDAQ uses term "Time In Force", TIF to determine when orders can be executed.
    I.E. market or extended hours
  52. Single Book has been replaced by "NASDAQ market Center" or the "System"

    self solved many regulatory issues like locked or crossed markets and trade thrus and cosolidates teh limit order book
    displays all limit orders for all NGM and NCM securities and also all NYSE and NYSE-market issues.
  53. mixed lot - a round lot and an odd lot in the same order

    under $1 stocks can be priced to 4 decimal places, above only to penny

    MPID - market participant ID for market maker ID

    Can put NSDQ as MPID and remain anonymous

    orders and quotes are time stamped

    orders are filled FIFO

    each increase in quote size gets a new timestamp but decreasing size does not.
  54. as order is filled, the size is decremented and a market maker's quote can go to zero, so a "RESERVE" Size is used to refresh and maintain two sided quote.  So, a market maker can have a firm quote on for 1000 shares and have a reserve (at the same price) for 2000 shares.  So, if the order takes teh 1000 shares, it will be replaced by the same quantity that had originally been displayed and the reserve quantity reduced.
    • Order of execution:
    • - displayed orders
    • - undisplayed orders (such as Reserve)
    • - discretionary orders that have an undisplayed portion on the books
  55. Market Maker Peg Order - MMPO - special order used to refresh a quote, set a certain distance from the NBBO.

    if the MMPO is executed, the market maker has to manually refresh the quote.
    It is used to help maintain an attributable quote.
  56. Maximum number of order to be entered into the SYSTEM is 999,999 shares

    Must be specified as Buy, Sell (Long) or Sell (Short)
  57. ACES - Advanced Computerized Execution System - upgraded to ACES Pass Through System
    • smaller NASDAQ firms can put in orders and use this to move the orders to a market maker that can earn the spread with a set of order flow to it.
    • - the larger firm maintains teh limit order book
    • - automates executions
  58. ECN trading of NASDAQ securities -
    linked ECN's get their trades quoted on NASDAQ
    unlinked ECN's have to use the ADF, Alternative Display Facility (ADF)

    as usual, only sub-penny quaotes for issues trading less than $1.
  59. Section 3j, Chapter 5 page 100
  60. OATS
    • FINRAs Order Audit Trail System
    • each member firm is required to immediately record the details of an order when it is received, modified, cancelled and execution
  61. OATS reports for NYSE, NASDAQ, OTCBB and Pinksheet issues
    non- members of FINRA are not required to follow the OATS rules
  62. OATS - sends data thorughout the day and at the end of the day.
    Data is compared to the Automated Confirmation of Transactions Service ACT.
  63. ACT compares the OATS data to the executed info on the ACT service at the end of each day.
    • Market venues that MUST report to ACT are:
    • NGM, NCM, OTCBB Pinksheets, Third Market and Fourth Market

    NYSE has its own systems
  64. ACT reports NASDAQ listed issues - equity and equity equivalent. 

    Bonds (non-convert) trades done OTC are reported on TRACE - Trade Reporting and Compliance Engine
    Note that direct participation (limited partnerships) that are traded OTC via Pink Sheets must be reported to ACT also

    Unlinked ECNs use another trade reporting system, TRACS Trade Reporting and Comparison Service
  65. ACT system is open:
    8 am to 8 pm ET
    compares trade info entered by ACT pariticipants and submits locked in trades to division of Depository Trust and Clearing Corp (National Securities Clearing Corp, NSCC) for clearance and settlement
    provides participants with ability to enter pernegotiated priced traced, as for a gift

    send reports to the National Trade Reporting System

    provides participants the ability to review trades

    provides clearing firms the ability to monitor and mange risk
  66. NASDAQ created the Trade reporting facility, or TRF, to separate the reporting from the compliance function.
    TRF reports trades on NASDAQ issues, and for exchange listed issues that traded OTC (third market)  - since these are the issues that the NASDAQ is registered to operate as an exchange on.
  67. After about 2006, the NASDAQ no longer has responsibility for OTCBB or Pink Sheet trades.  All this responsibilty is now FINRA's.
    These trades (OTCBB and Pink Sheets and foreign stock trades) are reported on the ORF, Over the counter Reporting Facility, that is also run by ACT
  68. The TRF is broken into 4 feeds:
    NASDAQ TRF - trades of NASDAQ issues

    NYSE TRF - OTC trades of NYSE issues (third market)

    ORF - reprots of trades of OTCBB and pink sheets

    ADF/TRACS - reports trades of NASDAQ and NYSE issues that occur on ECNs and ATS (Alternative trading systems)
  69. ACT participants ahve to report trades within 10 seconds.

    Trades are reported by ACT market makers and ACT order entry firms.
    Only the executing member is required to report to aCT, ACT sends a report to the contra party to accept or decline, all trade reports are exclusive of mark ups, commissions, other charges
  70. Trade reports are required for round and odd lots.

    ACT sends to Contra party, which has 20 minutes to confirm, accept or decline trade
    20 minutes!
  71. ACT trade reporting nomenclature:
    • time of day        reporting           designation
    • 12 midnight       8 - 8:15 same day         T
    • 8 - 930              10 sec                          T
    • 930 - 4 PM         10 sec                          none
    • 4 - 8                  10 sec                          T
    • 8 - midnight       8 - 8:15 next day         as/of

    • Late reporting during 930 4 - late            .Z
    • late reporitng outside 930-4 -         .U with actual time of execution
  72. VWAP trades are reported by 430, but since they are manually prepared, FINRA is tolerant of serially late reports
  73. ADF - Alternate Display Facility - displays quotes from ECN's that were not linked (unlinked) from NASDAQ's SuperMontage.
    if a trade results from an unlinked ECN's quote, the trade will be reported through TRACs - Trade Reporting and and Comparison Service.  This is Third market trading - listed issues traded on an ECN.
  74. TRACS operates 8 to 630 - report trades within 10 seconds,

    if trade occurs after 630, report within 15 minutes of opening the next business day
  75. NASDAQ limit order protection rule - Manning Rule - prevents market makers from trading ahead of limit orders of customers.
    But firm can trade "alongside" their clients for their account if they immediately trade for their clients at the same price or better.
  76. If firm has institutional limit order, other customers may wish to trade alongside that order since it may move the market.  This is permitted if the institution with the limit order gives permission for each customer trade alongisde order.
  77. Once a limit order becomes "live", it must be filled within one minute.  i.e., promptly.  if there are multiple limit orders at the same price, the firm must have a process in place to repeately sequence those orders. i.e.,
    they can choose FIFO
  78. The customers of a firm are defined as the firm's customers, other member firms or other member firm's customers for the purposes of the limit order protection rule
    • the firm's orders are not so protected, neither are odd lots, "working orders"  - essentially "not held" orders.
    • ONLY applies during regular market hours, 930-400; however, if member agrees to extended hours execution of a limit order, then the rule applies.
    • Applies to ALL equity issues, NYSE, NYSE-MKT (AMEX), NASDAQ listed, OTCBB and Pinksheet issues.
    • NYSE has its own limit order protection rule (Rule 92)
  79. SEC Rule 604 - if market maker receives limit order priced better than its quote, it must show it within 30 seconds. - LIMIT ORDER DISPLAY RULE
    Prior to CLOB- central limit order book being electronic, a market maker could see a limit order, not display it, but now the CLOB handles this for everything but the OTCBB and Pink Sheets.  This rule forces market makers of OTCBB and Pink Sheets to display customer limit orders if they are better than their current quote.

    Don't have to update if "de minimum" i.e., 10% order or less than current quoted size
  80. Limit Order Display Rule - does not apply to:
    - odd lots
    - customer doesn't wish order to be displayed
    - blocks of at least 10,000 shares or over $200,000 value
    - All or None Limit orders
    - De Mimimus Orders - orders less than 10 pct of displayed quote size that is at the inside market
    - limit orders delivered to ECN's
  81. Limit order display rule and "Eligible ECN's":
    - ineligible ECN doesn't send best priced orders through NASDAQ, but eligible ECN's do both their subscribers and NASDAQ
    - if you put a better quote on an ECN than you are showing on NASDAQ:
    --- if it is an inEligible ECN, you have to change you NASDAQ quote to match it
    --- if it is an Eligible ECN, you dont' have to since the ECN will forward the quote to NASDAQ automatically.
  82. Trading and Market Making of Non-NASDAQ issues:
    - OTCBB can't be quoted if company is more than 30 days deliquinent in SEC filings
    - it can still be quoted on teh Pink Sheets since Pink Sheets is a private company and not part of FINRA
    • FINRA FORM 211 as in rule 15c-2-11 must be filed 3 days prior to issuing quotes.
    • EXCEPTIONs: PIggy Backing Exemption - continuous quote rule - if it has quoted the stock in 12 business days of precding 30 calendar days with no more than 4 consecutive business dyas w/o a quote, then there is proven market and other market makers can begin toquote immediately w/o filin Form 211
  83. FINRA FORM 211 exemptions: Unsolicited customer order - a firm can post a quote for a customer's order, but must withdraw the quote if order is filled or cancelled.
    • Existing market maker exemption -
    • if a firm was a marker maker for an issue and the issue is delisted from NASDAQ, due to failure to meet maintenance requirements, no FROM 211 required, if registration in thei sisue is effective by the close of business on teh trading day following the delisting announcement
  84. OTCBB quote types:
    Firm - either one or two sided
    BW - Bid Wanted
    OW - Offer Wanted
    • Minimum quote size:
    • 100 share minimum for $1 - $174.99

    All OTCBB quotes include the market maker's phone number so the contra's can call them.
  85. TRACE - Trade REporting and Compliance Engine -
    • - reports trades of corporate bonds, both inv grade and junk
    • - convertible and non-convertible bonds also
    • - corp new issue offerings are reported to TRACE, but it isn't disseminated
    • - after 2010/2011, all agency and mortgage debt must be reported
    • - NO REPORTING FOR EXEMPT ISSUES - treasury, money market and muni issues
    • - TRACE doesn't show quotes, only reports trades
    • - both buy and sell side report to TRACE, but FINRA reports only one trade.
    • - TRACE is open from 8 AM - 630 PM, must be reported within 15 minutes, if after 615 pm, can report in 15 minutes after opening next day.
    • - TRACE displays execution date and time, quantity and price and yield
    • - TRACE reports trade immediately
    - requirement to find the best market for customer: charater of the market, size and type of transaction, number of markets checked, location and accessiblily to the markets
    - for non-nasdaq or thinly traded OTCBB issues must get 3 quotes
    - interpositioning prohibited - going through a middleman to get an execution unless you can demonstrate it imiproves the price for the cusotmer
    • - Correspondent Relationpship are allowed - but a small pink sheet firm may have a correspondent NASDAQ firm to handle those trades - no extra charges to the client.
    • - Bona Fide Quotes - fictitious or deceptive quotes are prohibited, any nominal quotes must be identified as such.
    • - Backing Away Prohibited - unless system slowness had delayed an updated quote be shown, market maker doesn't have to fill at the non-updated price; or, is in the process of filling a trade when new order comes in and then quote has not had time to be updated.
    • - a LIABILITY ORDER - an execution error is not a permitted reason for "backing away", i.e., if customer enters order to be filled within 3 minutes, and market maker gets busy and doesn't fill it, and price moves, the mm is still liable to fill the order at the price the market was.
    • - No Front Running, usually,
    • 3 exceptions: 1) if chinese walls are between prop trading and customer trading so there was no connection between the orders; 2) firm can do transactions to correct orders or odd-lots ahead of large customer order; 3) VWAP orders where the firm has to pre-position inventory to fill the order and customer has agreed to front running.
    • - RULES TO CATCH ROGUE TRADERS: --- mandatory 10 consecutive day vacations
    • --- scrutiny of red flags - large positions tading limits, repeated requests for relaxation of controls ---access control or protection of firm records and books--- cultivate a culture of compliance
    • - 5% Policy - FINRA requires commission and markups are resonable and fiar, and 5% is a guideline
    • - markup based from inside market for active competitive markets, not the dealer's cost for those securities
    • - inactive issues - the markup/commission based on contemporaneous trades
    • - if market maker is cominating a market, the nthe markup/down is based on the dealer's comtemporaneous cost
    • - Applies to all OTC and Exchange Trades:
    • -- agency trades - commission must be disclosed to customer
    • -- principal trade - markup or markdown NOT disclosed unless issue is a NASDAQ stock
    • --riskless trades (i.e., a cross trade) markup must be disclosed
    • -- proceeds transaction - combined markup and commission is charged
    • - 5% policy doesn't apply to prospectus offerings - like 10% for limited partnerships, new issues, mutual funds, or exempt securities.
  87. Items to Consider for Markup
    - type of security, availability, volume, price, total value of trade, whether disclosure has been made prior to the trade what the commision/markup will be, pattern of markup, cost of providing teh services that member provides to the customers.
  88. Debt security comtemporaneous pricing exceptions
    • - interest rates moved after last transaction
    • - credit quality changed after last transaction
    • - new was issued that changed value since last transaction
  89. "Net Transaction" with customer - a riskless transaction principal where member doesn't fill order out of inventory, but rather goes out and buys it for a buying customer and then marks it up and sells it to customer
    - must have prior writen permission from customer to do a net order if not non-institutional customer.  if institutional customer, can do verbal or negative consent
  90. Sort interest must be reported bi-monthly - on 15th of each month and on last business day of month,
    filed by 2nd business day after reporting settlement date.
  91. NASDAQ Market Watch - SWAT - stock watch automated tracking, monitors the markets. detection of usual patterns
    Market watch receive reports of clearly erroneous trades
  92. ADRs on NASDAQ
    • - large bank buys foreign stock, issues stock in the trust which US investors can buy,
    • - investors do not get to vote the foreign stock
    • - American Depository Receipt, the receipt is the evidence you have for your claim on the portion of the foreign stock trust.
  93. PORTAL MARKET - used to trade Rule 144A issues that are exempt from registration fy the rule among large institutional investors (Qualifed institutional buyers, QIB's)
    - FINRA created PORTAL market - Private Offerings, Resale, Trading through Automated Linkage.
    • Only securities designated - i.e., initially offered under Rule 144 or 144A.
    • Can only interact with QIB's, or investors exempt from 1933 Act, or to another member firm;
    • - quotes are entered 730 AM to 630 PM, trades must be reported within 15 minutes
    • - Members who are QIBs can elect to become PORTAL participants by submitting quotes, members are not QIBs and can electto become PORTAL brokers adn can complete transaction in PORTAL securities on an agency basis for QIBs
    each regulator of the marketplace sets their own rules and regulations.  customer disclosure rules are set by FINRA and SEC.  settlemetn and delivery rules are set by FINRA under the Uniform Practice Code
  95. Confirmations
    - must be sent by the completion of transaction - which is defined as settlement date
  96. Confirmations must contain:
    • - customer name and address
    • - firm name, address and phone number
    • - name of security
    • - size of trade, price, trade date, settlement date, accrued interest if bond trade, commission (if agency) or markup (if principal and NASDAQ)
    • - if there was payment for order flow, fee paid by market maker to introducing broker
    • - CUSIP number (Committee on Uniform Security Identification Procedures).
    • - no longer need to have the market where the trade occurred printed on the confirm, no longer necessary since NMS
  97. Settlement Dates and Options
    • "Regular Way" - stock, corp bond and muni bond - 3 days
    • "Regular Way" - gov bond and options, next day
    • Cash settlement is same day settlement, prior to 2:30 PM - prices are usually lower since it is difficult to arrange for settlement on same day

    Seller's option - used if seller needs more than 3 days, seller gives buyer 1 day notice.

    Buyer's option - used if buyer needs more time, buyer gives seller 1 day notice

    • WAII, Whan, As and If Issued - confirm doesn't have confirm date, since it is unknown, coudl be cancelled if issue is not issued.
    • Settlement date on WAII set by Uniform Practice Code Committee.
  98. Settlement general rules

    - if security is delivered prior to settlement date, buyer can refuse or accept delivery

    - on settlement, buyer must accept delivery.

    - The seller pays all delivery expenses
  99. Settlement Comparisons and DK notices
    • - if not automatically done with ACT, sent no later than next day by both firms.
    • - contains: trade date, settlement date, size, security traded, execution rice, CUSIP
    • - no customer or commission information
    • - if trade doesn't match, a "Don't Know", is issued, the last day to issue is the business day prior to settlement.  if cash settlement, must do DK same day as trade
  100. Good Delivery of Securities
    - assignment - registered securities must be endorsed - this is called "assignment", but often they are endorsed on a stock or bond power
    • Signature Guarantee by medallion member -
    • - if signature is fraud - loss is Medallion Guaranteer's liability.
    • - registered to principal bonds must have a proper assignment and a signature guarantee.  these bonds have bearer coupons attached adn since on teh face amount is registered, all unpaid coupons must be attached.

    Bearer bonds must be delivered with all coupons attached, even if in default.
  101. Units of Delivery (for all domestic securities) and ADR's, not valid for foreign securities
    Stock - round lots of 100 shares or multiples of 100 on one certificate, if certs are less than 100, must add to units of 100.  i.e., 8 certs of 50 okay, but 5 certs of 80 is not since can't put certs together and get to 100 shares.  could have 80 cert plus 20 cert.

    - registered bonds - $1000 minimum face amoutn adn mulitples of $1000, up to max of $100,000 per bond

    Mutiplated secuties are no good unless validated by trasnfer agent

    Muni bonds must  be delivered with legal opinion unless sold "ex-legal" meaning coming w/o legal opinion.

    Insured muni bonds must be delivered with proof of insurance

    - interest accrused up to but doesnot include settlement date

    - corp bonds accrue interest 30 day month, 360 day year. 30/360

    - if interest pay on jan 15 and july 15, then you actually have 16 days in the jan or july to count, then the 30 days per month until you get to the month the bond was sold, then you count up until, but do not count, the settlement date. 

    - so, ex: jan/july 15 bond sold on Oct 8, monday, 16 days july, 30 aug, 30 sep, 8 + 3 is settlement, but don't count settlement, so 10.
    16 +30+30+10, or 86 days of interest accured!

    example:  if bond is sold on Monday, it settles on Thursday, so it will accrue interest (to be obtained from buyer since buyer will get full 6 months interest at end of 6 months term), through Wednesday.
    - buyer is only expected to pay interest if the bond is currently paying interest.  IF NOT PAYING INTEREST, TRADING "FLAT"

    • - types of bonds that "trade flat" -
    • zero coupon
    • defaulted bonds
    • income bonds - since not currently playing interest
    • commercial paper and treasury bills
  103. Accured interst on Government Issues - computed on actual day month, actual day year basis, interest accrues up to but not including settlement (which is NEXT BUSINESS DAY)
    so, if bond pays Jan 1, Jul 1, is sold on March 3, monday, then it accrues for 31 days (Jan), 28 days (Feb), and 3 days (March), settlement is March 4, next day.  62 days.

    Since there are 31 (jan), 28, 31, 30, 31, 30 - then 181 days in that six months, 62/181 is the fraction paid.
  104. Government bonds never trade flat, unless they are treasury bills.
  105. Due bills and Due bill checks

    - if trade occurs before dividend ex and settlement is after ex-date and dividend is mailed to seller, but buyer should have received it, the firm will send a "due bill" to the contra firm.
    - when trade takes place before ex-date, (trade "cum" the distribution).  but settlement doesn't take place until after record date.
  106. EX-dates
    Declaration date - date the dividend is dceclared

    Record date - date on which the corporation takes teh sharehold names and address form teh transfer agent to use them to mail the dividend checks.

    Payable date - date the dividend checks will be mailed by the transfer agent

    Regular way settlement - trade must settle by record date to receive dividend, if record date is the 15th, then trade must settle on or before the 15th to receive the dividend.

    • Last day to trade and receive the dividend is 3 days prior to record date.  if record is a Friday, must buy on Tuesday.  If buys on Tuesday or before, buyer will get dividend "cum dividend".
    • If buys on Wednesday or later, buyer does not get dividend, but paid a lower price since FINRA said price is lowered by dividend on ex-date.

    Ex-date (regular way settlement), is 2 business days prior to record date.

    Pirce is lowereed by rounding up any sub-penny amount of dividend.  Ie., dividend is 0.055$, it is rounded up to $0.06 cents and a $5 stock will open at $4.94/share on ex-date.
  107. Record date - "the Daily List", 10b-17 - issues must give 10 days notice of setting of a record date, FINRA uses this data to produce a daily list of the record dates of stocks going ex-dividend, etc.
  108. For stock dividend, (splits), the ex-date is the business day after the payable date. 

    if buyer buys after ex-date, he will use due bill process to get his other shares when they are mailed or delivered.

    Buy in - if shares are not delivered, buyer can buy in charge any loss to seller and can do on 3 BUSINESS DAYS AFTER SETTLEMENT

    Sell out - if shares are delivered are not paid for in a settlement, then the seller can SELL OUT 1 BUSINESS DAY AFTER SETTLEMENT

    - rejection occurs when securities are delivered upon settlement and refused for a valid reason.  Uniform Reclamation Form can be returned with the securities adn delivereing firm must rectify promptly.
    - reclamation is when delivered securities originally accepted are later determined to not be in good order.  if part of a large delivery, only the bad securities are returned with Uniform Reclamation Form

    Reclamation for minior irregularities must be made within 15 days of delivery.  Also, reclamation where certificate was not a good delivery must also be made within 15 days.

    major irregularities have 30 months to be reclaimed.

    Reclamation because tfer agent refused security, is lost, or stolen, must also be made within 30 months of the delivery.
    • - there are 4 registered clearing agencies:
    • National Securities Clearing Corp (part of DTCC - Depository Trust and Clearing Corp)
    • Midwest Clearing Corp
    • Philadelphia Clearing Corp
    • Pacific Clearing Corp
  112. How securities are cleared - all the purchases and sells are netted and if there is an excess of purchases, the firm will have to send additional funds, if there are more sells, then funds will be released back to that firm
    - this is called continuous net settlement system
  113. Clearly Erroneous Trades
    • - member has 30 minutes to notify NASDAQ Marketwatch after execution.
    • - NASDAQ will contact contra broker and get their side, within 30 minutes of notification
    • - NASDAQ provides written determination, cancelling, adjusting or declining to act (confirming 1 sides' case)
    • - either side can appeal within 30 minutes and Market Operations Review Committee will review and make final and binding decision.
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2015-09-19 00:00:56

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