Series 57 Practice Exam

The member participant identification number, MPID, is the identifier on the NASDAQ Level 2 or Level 3 system.

$1,000 of net capital for each stock below $5, plus $2,500 of net cap for each stock above $5 per share. The market maker cannot have less than $100,000 of net capital regardless of how many or how few stocks in which they make a market, and generally need not have higher than $1,000,000 of net cap on behalf of this regulation. However, because 15c3-1, the net capital rule, requires all B/Ds to have net cap of no less than one fifteenth of their Aggregate Indebtedness, a firm may have a much higher net capital requirement than this market maker minimum calculation would otherwise provide. But as it is written, $300,000 is the minimum: 50 stocks at $1000 each plus 100 stocks at $2,500 each = $300,000.

Though answer B could be correct, answer C is the best answer. A purchase order which will not be triggered, and executed, above the current market value is a buy stop order.

Though answer A could possibly be correct, answer B is the better choice – a market maker is prohibited from entering a quote which crosses the existing market quotes on NASDAQ. A bid which is higher than the best Ask price, or an Ask price which is lower than the best bid price, is crossing quotes, and as mentioned, is prohibited.

Passive market making occurs when a member is part of an underwriting syndicate for a follow-on/additional share offering and is a market maker in the outstanding stock of that issuer. Rule 103 of Reg. M mandates that the member either excuse itself from market making during the underwriting process or reduce the volume of its market making activity to 30% of its regularly established market making volume before the underwriting commenced.

Rule 10b-10 requires disclosure of capacity on customer confirmations.

At the opening on the ex-dividend date for a regular cash dividend, the specialist/designated market maker will automatically reduce all Buy Limit and Sell Stop orders on their book, unless the customer has directed their B/D to issue DNR (do not reduce) instructions.

Regulation SHO (SHO are the first 3 letters of the word SHORT, which is a good mnemonic device to remember this rule) has many provisions. One of the more important provisions is the requirement that the order department reasonably assure itself that the stock being shorted can be located and loaned to the seller – and delivery can and will take place the regular way.

Odd as it may sound, FINRA requires that all member firms have the capacity to time stamp all order tickets in military time, accurate right to the second, and coordinated with the time clock FINRA uses. For example, when FINRA says orders received up until 7:59;59 am each day, they mean exactly 7:59;59 – and such pre-market trades will be reportable on the tape by 8:15;00 that business day morning.

Volume-weighted Average Price (VWAP) orders and Intermarket Sweep Orders (ISO) are two examples of cases in which the order may be executed with priority over already-existing public customer orders, even though the VWAP and ISO execution price may not otherwise have been afforded priority.

Market at the opening and market at the close (MOO and MOC) are fairly popular orders in the marketplace.

Quotes for NYSE- and NASDAQ-listed stocks will be in increments of pennies. However, for Pink Quote system stocks and OTC Equity/non-NASDAQ stocks, it is possible to have a quote in fractions of a penny, so-called sub-penny quotes or increments.

An example of a "net trade" would be as follows: Your firm purchases 1000 shares of a NASDAQ stock from a market maker at an asking price of $80 per share, and you then sell it to a customer at $80.10, plus a fair reasonable retail mark-up in accordance with FINRA’s 5% policy. That extra 10 cents per share ($80.10 versus $80.00) makes it a "net trade." Your firm would need to get client consent in order to do a net trade of this type. Typically, your firm would sell the stock to the client at your cost of $80, plus a fair mark-up, without the 10-cent add-on. That would be called a simultaneous, riskless transaction.

FINRA Rule 5130 prohibits the purchase of equity IPO shares by a substantial list of restricted persons including but not limited to: member firms for their own account, personnel employed by member firms in any capacity, or immediate family members of restricted persons.

Regulation NMS includes the Limit Order Display Rule, which requires customer limit orders be displayed on the NASDAQ system under the MPID of their member firm, unless the firm simply fills the order when received, sends the order to another member firm who displays it, or sends the order to an ECN who displays it.