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All NASDAQ Market Makers will identify their B/D on the Level 2 or Level 3 system with a unique:
Question 1 Explanation:
The member participant identification number, MPID, is the identifier on the NASDAQ Level 2 or Level 3 system.
The minimum net capital requirement for a member firm which makes a market in 50 stocks below $5 per share and 100 stocks above $5 per share is:
$1,000,000 for engaging in market making activities
$300,000 subject to the potential higher minimum comp. for aggregate indebtedness
$1,500,000 if the firm engages in executions through a clearing B/D
Question 2 Explanation:
$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.
An order to purchase 1000 shares of XYZ stock at a price above the current market is most likely a:
Buy limit order
Buy stop-limit order
Buy stop order
Market order to buy with restrictions
Question 3 Explanation:
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.
FINRA rules state that a market maker may not enter a quote into the NASDAQ system which:
Locks with the quote of another market maker
Crosses with the quote of another market maker
Intimidates another market making firm
Exceeds the inventory position of the entering B/D
Question 4 Explanation:
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.
Regulation M Rule 103 specifies the conditions under which passive market making is required. These conditions would include:
The firm is a market maker while also in the syndicate of an IPO
The firm is a market maker while also in the syndicate of a follow-on offering
The firm is contemplating becoming a market maker once the underwriting syndicate is disbanded
The firm wishes to limit its market making risk while underwriting a new issue
Question 5 Explanation:
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.
SEC Rule 10b-10 pertains to which of the following?
Fraud is prohibited in the sale of new issues of stock
A prospectus must be furnished to a customer purchasing shares of a new issue
Advertising which implies a guarantee against loss in the sale of securities is not permitted
A confirmation must be provided to a purchaser which discloses the capacity in which the B/D has acted
Question 6 Explanation:
Rule 10b-10 requires disclosure of capacity on customer confirmations.
On the ex-dividend date for a cash dividend, which orders are automatically reduced at the opening by the designated market maker (specialist)?
Buy stop and sell limit orders
Buy limit and sell limit orders
Buy limit and sell stop orders
Sell stop and sell limit orders
Question 7 Explanation:
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.
When a short sale order is placed, the locate rule will likely come into play in order to assure an efficient and timely execution and settlement. The conditions of this rule are covered in:
FINRA rule 5130
Question 8 Explanation:
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.
FINRA mandates that member firms must periodically coordinate which of the following with FINRA?
The clocks used to time stamp orders
The back office books and records regarding customer complaints
The annual compliance meeting
Continuing education training and examinations
Question 9 Explanation:
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.
Though trading ahead and front running are normally prohibited, there are at least two exceptions, including:
When it is approved by an OSJ Principal
When it is a VWAP or an ISO order
When it is clearly an erroneous transaction
When accommodating a large client order
Question 10 Explanation:
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.
MOO and MOC orders are:
Market at the opening
Market at the close
Both A and B are correct
Neither A nor B are correct
Question 11 Explanation:
Market at the opening and market at the close (MOO and MOC) are fairly popular orders in the marketplace.
Among its many provisions, Regulation NMS provides that NASDAQ and NYSE stock transactions shall occur in minimum increments of one penny per share. Sub-penny trading:
Is only permitted in OTC Non-NASDAQ stock trading
Is only permitted on Regional stock exchanges
Is only permitted for VWAP orders
Is never permitted under any circumstances
Question 12 Explanation:
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.
A net trade occurs:
When your firm purchases stock from a market maker and then re-sells the stock to a retain client at a price higher than your contemporaneous cost, plus a fair reasonable mark-up
When your firm purchases stock on a wholesale basis for the firm’s inventory
When your firm sells stock out of inventory at contemporaneous cost plus mark-up
When you firm sells stock out of inventory at contemporaneous cost with no mark-up
Question 13 Explanation:
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 provides that no member firm or its personnel or immediate family members:
May have an account at their employing member firm
May lend money to customers to assist them in completing their trades
May purchase shares of an equity IPO
May extend credit on new issues
Question 14 Explanation:
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.
The limit order display rule holds that customer limit orders:
Must be displayed on the NASDAQ system
May be forwarded to an eligible ECN for display
May be executed immediately at the firm’s bid or ask quote
Will be given priority over the firm’s transactions even when the firm is willing to do a trade at a better bid or ask price
Question 15 Explanation:
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.
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There are 15 questions to complete.