Index

A AQR (automatic quote refresh) C Access equals delivery rule, 3 feature, 48–49 Canadian businesses, small, 13 Accidental withdrawal of quotes, 69 Asset transfers, 14 Capping, 116 Accounts: Attributable orders, 72 Churning, 115 prime brokerage, 123–124 Automated Confi rmation System Circuit breakers, 33–34 wrap, 125 (ACT), 73–79 Clearly erroneous reports, 121 Accredited , 9 Automatic quote refresh (AQR) Close outs, 122 ACES (Advanced Computerized feature, 48–49 Closing cross, 67 Execution System), 52–53 Average weighted price (AWP) Collusive behavior, 118–119 ACT (Automated Confi rmation trades, 76 Commissions, 95–106 System), 73–79 Awards, of issues, 8 for brokers vs. dealers, 95–96 ACT/TRF Trade Scan, 59, 74–79 in dominated and controlled Additional issues, 7 B markets, 98–99 ADF (Alternative Display Facility), Backing away violations, 101 and EBS, 102–103 51–52 Best market, 27 FINRA 5% markup policy, 96–97 Adjustments, for splits, 28 Bids: and fi rm quote rule, 100–101 Advanced Computerized Execution competitive bid underwriting, 8 markups/markdowns when System (ACES), 52–53 national best bid and off er, 44 acting as principal, 97 Affi rmative determination, 29–30 penalty, 82–83 for net transactions with Aft ermarket purchasers, 3–4 stabilizing, 85 customers, 99 Agents: Blanket recommendations, 117 and OATS, 102–103 brokers as, 95 Borrowing, securities, 31–32 pretest, 105–106 specialists/DMMs as, 26–29 Brochure delivery, 125 for proceeds transactions, 98 Aggressive electronic SDGY orders,COPYRIGHTED Brokers: MATERIALand protection of customer 51 dealers vs., 95–96 orders, 100 AIQ (Anti Internalization prime, 124 for riskless principal transactions, Qualifi er), 71 Broker dealers: 98 All or none (AON) orders, 24 correspondent, 73 and trade complaints between Alternative Display Facility (ADF), ECNs registered as, 53 members, 102 51–52 quarterly reports fi led by, 55 Compensation, for fi rms, 95. See Alternative trading systems, 56 registering as market makers, also Commissions Amendment, posteff ective, 15 41–42 Competitive bid underwriting, 8 Anti Internalization Qualifi er Broker transactions, 11 Complaints: (AIQ), 71 Buy limit orders, 22 of backing away violations, 101 AON (all or none) orders, 24 Buy stop orders, 23 trade, between members, 102

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Confi rmations: Deceptive devices, 115–116 Execution errors, 121 Automated Confi rmation System, Delivery: Execution systems (), 46–49 73–79 access equals delivery rule, 3 Exemptions: customer, 122–123 of borrowed securities, 31–32 from ACT/TRF reporting, 77, 78 Consolidated Quotation System of brochures, 125 to FINRA Rule 5130, 5 (CQS), 59 Depository Trust Clearing from penny stock cold call rule, 114 Consolidated tape, 34–35 Corporation (DTCC), 52 to Rule 101, 82 Controlled markets, 98–99 Designated examining authority to Rule 102, 83 Control securities, 11 (DEA), 108 to Rule 105, 87 Control stock, 11 Designated market makers (DMMs), from SEC Rule 15c2-11, 43 Cooling off period, 2 25–29 from TRACE reporting Corporate securities, 1–19 Direct electronic access, 51–52 requirements, 87 awarding the issue, 8 Distribution compliance period, 12–13 Exempt securities, 8–9 exempt securities, 8–9 , selling, 118 Exempt transactions, 9–14 exempt transactions, 9–14 DMMs (designated market makers), Extended hours (X) orders, 67 FINRA Rule 5130, 5–6 25–29 Extended hours trading, 40 pretest, 17–19 DNR (do not reduce) orders, 27 prospectuses for, 2–4 Domestic investors, 12–13 F Rule 137, 14 Dominated markets, 98–99 Fair dealings, with clients, 115–119 Rule 138, 14 Do not reduce (DNR) orders, 27 Fill or kill (FOK) orders, 24 Rule 139, 14–15 Double reporting: Final prospectuses, 3 Rule 415, 15 to ACT/TRF, avoiding, 76–77 Financial relief, 4 and Securities Act of 1933, 1–2 of third-market trades, 78 FINRA 5% markup policy, 96–97 tombstone ads for, 4–5 DTCC (Depository Trust Clearing FINRA/Nasdaq Trade Reporting types of off erings, 7 Corporation), 52 Facility, 79 underwriting, 6–7 Dual agency, 123 FINRA Rule 4400A, 52 and underwriting syndicate, 8 FINRA Rule 5130, 5–6 Correspondent broker dealers, 73 E Firewalls, 113 Covered securities: Early regular hours orders, 67 Firm commitment underwriting, 7 defi ned by SEC Rule 11Ac1-1, 101 EBS (Electronic Blue Sheets), 102–103 Firm quotes: in market centers, 54 ECNs, see Electronic defi ned, 40 CQS (Consolidated Quotation Communication Networks nominal vs., 45 System), 59 ECN Display Alternative Rule, 71 Firm Quote Compliance System Crossed markets, 45 Electronic access, 51–52 (FQCS), 101 Customers: Electronic Blue Sheets (EBS), Firm quote rule, 100–101 established, 114 102–103 Fixed income securities, 87 institutional, 99, 118 Electronic Communication FOK (fi ll or kill) orders, 24 net transactions with, 99 Networks (ECNs): Form 1-A, 13 Customer confi rmations, 122–123 and customer limit orders, 71 Form 144, 11 Customer limit orders, 69–73 to lower spreads, 40 Form ADV part II, 125 Customer orders, 100 for OTC securities, 53–54 Form S-1, 1–2 Eligible ECNs, 71 Form SB1, 13 D Errors, execution, 121 Form SB2, 13 Daily purchase limit (passive market Established customers, 114 , 59 makers’), 84 Exchanges: FQCS (Firm Quote Compliance Dark pools (term), 59 Nasdaq as, 39 System), 101 Day orders, 21 as securities marketplace, 25 Fraudulent acts, 117 DEA (designated examining UTP, 54 Free riding and withholding rule, authority), 108 Excused withdrawal, of quotes, 5–6 Dealers, 95–96 68–69 Front running, 116

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G nonaccredited, 9 negotiated, 39 Good til cancel (GTC) orders: off shore, 12 Pink OTC, 58 defi ned, 21 -to-investor transactions, 21 primary, 1 orders treated as, during market IOC (immediate or cancel) orders, secondary, 3–4, 21 halts, 34 24 third, 58–59 Greenshoe option, 86 IO (imbalance only) orders, 67 two-sided, 39–40 GTC orders, see Good til cancel IPOs, see Initial public off erings Market centers, 54–57 orders ISG (Intermarket Surveillance Market hours day (MDAY), 49 Guarantees, 117 Group), 103 Market hours good-till-cancelled ISOs (intermarket sweep orders), 50 (MGTC), 49 H Issues: Market hours immediate or cancel Hearing Offi cer, 102 additional, 7 (MIOC), 49 Hot issues, 5–6 awarding, 8 Market makers, 65–73, 79–87 hot, 5–6 and customer limit orders, 69–73 I new, 7 entering quotes, 65–68 Imbalance only (IO) orders, 67 stabilizing, 84–86 and interpositioning, 73 Immediate or cancel (IOC) orders, Issuers, repurchasing their own and IPO pricing, 86–87 24 securities, 109–110 for OTC securities, 39–40 Indicative price, 66 ITS (Intermarket Trading System), passive, 83–84 Indirect electronic access, 51–52 59 pretest, 91–94 Inferior quotes, 49 registering as, for OTC securities, Information, nonpublic material, L 41–43 112 Late regular hours orders, 67 and step out trades, 79–80 Initial public off erings (IPOs): Legend stock, 10 and syndicate positions, 86 defi ned, 7 Lettered stock, 10 during syndication, 81–86 pricing of, by market makers, Liability orders, 101 and trading halts, 80–81 86–87 Limit on close orders, 34 withdrawing quotes, 68–69 Inside market: Limit orders, 24 Market making: defi ned, 27 Limit Order Display Rule, 69 payments for, 45–46 and Nasdaq quotes, 44 Limit Up Limit Down (LULD) rule, during syndication, 81–86 Insiders, 112 34 Market on close orders: Insider trading, 112 Linked ECNs, 71 cancelled due to market halt, 34 Insider Trading and Securities standards (Nasdaq), 113 defi ned, 24 Fraud Enforcement Act of Live orders, 23 Market on open orders, 24 1988, 112 Locked markets, 45 Market orders, 22 INSTINET, 59 LULD (Limit Up Limit Down) rule, Market out clause, 7 Institutional customers: 34 Market participant identifi ers net transactions with, 99 (MPIDs), 41 recommendations to, 118 M Market peg orders, 51 Intermarket Surveillance Group Manipulative devices, 115–116 Marketplace (securities), 21–38 (ISG), 103 Manning Rule, 72 Market Regulation Committee Intermarket sweep orders (ISOs), 50 Markdowns, 97 (MRC), 52 Intermarket Trading System (ITS), Markets: Market Regulation Department, 101 59 best, 27 Marking the close, 116 Interpositioning, 73 controlled, 98–99 Marking the open, 116 Investment Advisors Act of 1940, crossed, 45 Markups, 97 125 dominated, 98–99 Material facts, omitting, 117 Investors: fourth, 59 Material information, 112 accredited, 9 inside, 27, 44 MDAY (market hours day), 49 domestic, 12–13 locked, 45 Mergers, 13–14

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MGTC (market hours good-till- Nasdaq Stock Watch, 80–81 O cancelled), 49 Nasdaq subscription levels, 40–41 OATS (Order Audit Trail System), Mid point peg orders, 51 Nasdaq TotalView quotation 102–103 Minimum quantity orders, 50 service, 40–51 OCF (Order Collector Facility), 46 MIOC (market hours immediate or Nasdaq workstation, 46 ODF (Order Display Facility), 46 cancel), 49 National Association of Securities Off ers, tender, 110–112 Misrepresentations: Dealers Automated Quotation Off erings: and fair dealings, 117 System, see Nasdaq of corporate securities, 7 on prospectuses, 4 National best bid and off er (NBBO), IPOs, 7, 86–87 MPIDs (market participant 44 municipal bond, 8 identifi ers), 41 National Securities Clearing primary, 7 MRC (Market Regulation Corporation (NSCC): Regulation A, 13 Committee), 52 and automatic executions Regulation D, 9–10 Municipal bond off erings, 8 through Nasdaq, 47 Regulation S, 12–13 and threshold securities, 32 secondary, 7 N NBBO (national best bid and off er), small business, 13 Nasdaq, 44–51 44 subsequent primary, 7 as exchange, 39 Negative consent letter, 99 Off shore investors, 12 execution systems for, 46–49 Negotiated market, 39 On open (OO) orders, 67 listing standards of, 113 Negotiated underwriting, 8 Opening cross, 66 locked and crossed markets, 45 Net order imbalance indicator Orders: Nasdaq Market Center for Listed (NOII) system, 66 aggressive electronic SDGY, 51 Securities, 59 Net transactions, with customers, 99 AON, 24 order entry parameters for, 49–50 New issues, 7 attributable, 72 order routing process for, 50–51 New York (NYSE), buy limit, 22 pegged orders on, 51 25 buy stop, 23 pretest, 61–62, 64 NH (not held) orders, 24 customer, protection of, 100 quotes on, 44–45 NMCES, see Nasdaq Market Center customer limit, 69–73 subscription levels of, 40–41 Execution System day, 21 Nasdaq BBO, 44 NOII (net order imbalance DNR, 27 Nasdaq crossing network, 67 indicator) system, 66 early regular hours, 67 Nasdaq halt cross, 68 Nominal Nasdaq quotes, 45 FOK, 24 Nasdaq Inside, 44 Nonaccredited investors, 9 GTC, 21, 34 Nasdaq international, 57 Nonattributable orders, 72 IO, 67 Nasdaq Level I subscription, 40 Nondirected orders, 55 IOC, 24 Nasdaq Level II subscription, 40 Nonequivalent securities, 14 ISOs, 50 Nasdaq Level III subscription, 40 NonNasdaq OTC Bulletin Board late regular hours, 67 Nasdaq Market Center Execution (BB), 57–58 liability, 101 System (NMCES): NonNasdaq securities, 11 limit, 24 automatic execution of orders by, Nonparticipants, 14 limit on close, 34 66 Nonpublic information, 112 live, 23 as execution system, 46–49 Nonpublic material information, 112 market, 22 and locked/crossed markets, 45 NOOP (Nasdaq Offi cial Opening market on close, 24, 34 quotes entered through, 47–49 Price), 66–67 market on open, 24 Nasdaq Market Center for Listed Not held (NH) orders, 24 market peg, 51 Securities, 59 NSCC, see National Securities marking of, 31 Nasdaq Market Operations, 102 Clearing Corporation mid point peg, 51 Nasdaq Offi cial Opening Price NSDQ function, 71–72 minimum quantity, 50 (NOOP), 66–67 NYSE (), NH, 24 Nasdaq quotes, 44–45 25 nonattributable, 72

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nondirected, 55 for, 58–59 Quotes: OO, 67 TRACS, 52 entered by market makers, 65–68 pegged, 51 and UTP, 54 entered through NMCES, 47–49 price to comply, 50 fi rm, 40, 45, 100–101 primary peg, 51 P inferior, 49 proprietary, 72 Painting the tape, 116 on Nasdaq, 44–45 protection of, by Nasdaq, 47 Partial tenders, 111–112 nominal Nasdaq, 45 reactive electronic STGY, 51 Passive market makers, 83–84 on OTC BB, 57–58 SCAN, 50–51 Passive market makers’ daily piggybacking, 43–44 in securities marketplace, 21–24 purchase limit, 84 protected, 55 sell limit, 22 Payment dates, 120 two-sided, 40 sell stop, 23 Pegged orders, 51 withdrawing, by market makers, stop, 22–23 Pegging, 116 68–69 stop limit, 24 Penalty bids, 82–83 stop loss, 22–23 Penny , 58, 113–114 R system, 49–50 Penny stock cold call rule, 113–114 Reactive electronic STGY orders, 51 undisplayed customer limit, Piggybacking quotes, 43–44 Reclassifi cation, 14 72–73 Pink OTC Market, 58 Recommendations: X, 67 Pink Sheets, 58 blanket, 117 Order Audit Trail System (OATS), Posteff ective amendment, 15 to institutional customers, 118 102–103 Preliminary prospectuses, 2 and short sales, 118 Order Collector Facility (OCF), 46 Price: Red herring, 2 Order Display Facility (ODF), 46 AWP, 76 Registration: Order entry parameters (Nasdaq), indicative, 66 posteff ective amendment to, 15 49–50 of IPOs, 86–87 shelf, 15 Order imbalances, 66 NOOP, 66–67 Registration statement, 1–2 Order marking, 31 protected, 55 Regulation A off erings, 13 Order protection feature, 47 VWAP, 34 Regulation D off erings, 9–10 Order protection rule, 55 Price to comply orders, 50 Regulation Filing Application Order routing process (Nasdaq), , 1 (RFA), 33 50–51 Primary off erings, 7 Regulation M, 81–87 Order shredding, 46 Primary peg orders, 51 Regulation SHO, 30 OTC Bulletin Board (BB), 41–42 Prime broker, 124 Regulation S off erings, 12–13 OTC , 100–101 Prime brokerage accounts, 123–124 Relief, fi nancial, 4 Over-the-counter (OTC) securities, Principals, 26 Reorganization, 13–14 39–46, 51–59 Private placement, 9–10 Reports: ACES, 52–53 Proceeds transactions, 98 clearly erroneous, 121 ADF, 51–52 Proprietary orders, 72 double, to ACT/TRF, 76–77 ECNs, 53–54 systems, 59 research, 14–15 fourth market for, 59 Prospectuses, 2–4 third-market, 78 market centers for, 54–57 Protected price, 55 TRACE, 88 market makers for, 39–40 Protected quotes, 55 of trades, see Trade reporting nonNasdaq OTC BB for, 57–58 Purchasers, aft ermarket, 3–4 UARs, 85–86 payments for market making, Purchaser representatives, 10 Research reports, 14–15 45–46 Restricted period, 82 piggybacking quotes for, 43–44 Q Restricted securities, 11 Pink Sheets, 58 Qualifi ed Institutional Buyers , 10, 11 pretest, 61, 63 (QIBs), 11–12 RFA (Regulation Filing registering as market makers for, Qualifi ers, for consolidated tape, 35 Application), 33 41–43 Qualifying ECNs, 71 Riskless principal transactions, 98

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Round lots, 35 nonequivalent, 14 Sell limit orders, 22 Rule 80B, 33–34 nonNasdaq, 11 Sell stop orders, 23 Rule 101 (Regulation M), 82 OTC, 39–46, 51–59 Settlement dates, 120 Rule 102 (Regulation M), 83 restricted, 11 SGTC (system hours good-till- Rule 103 (Regulation M), 83–84 subject, 101 cancelled), 50 Rule 104 (Regulation M), 84–86 threshold, 32–33 Shelf registration, 15 Rule 105 (Regulation M), 86–87 when-issued, 121 SHEX (system hours expire time), Rule 137, 14 Securities Act of 1933, 1–2 50 Rule 138, 14 Securities and Exchange Short positions: Rule 139, 14–15 Commission (SEC), 108–109 maintenance of records of, 33 Rule 144, 10–12 Securities Exchange Act of 1934, syndicate, 86 Rule 144A, 11–12 107–108 Short sales: Rule 145, 13–14 Securities industries rules and and recommendations, 118 Rule 200, 30–31 regulations, 107–129 in securities marketplace, 29–34 Rule 203, 31–32 for brochure delivery, 125 Short tendering, 111 Rule 415, 15 fair dealings with clients, 115–119 SIOC (system hours immediate or for fi rewalls, 113 cancel), 50 S Insider Trading and Securities Small businesses, 13 Safe harbor guidelines, 109–110 Fraud Enforcement Act of Small business off erings, 13 Sales: 1988, 112 Specialists, 25–29 of dividends, 118 Investment Advisors Act of 1940, Specialist bill, 27 short, 29–34, 118 125 Spreads, 40 SCAN orders, 50–51 for issuers repurchasing their own SROs, see Self regulatory SEC (Securities and Exchange securities, 109–110 organizations Commission), 108–109 penny stock cold call rule, Stabilization, of new issues, 84–86 SEC disclaimer, 4 113–114 Stabilizing bids, 85 , 3–4 pretest, 127–129 Step out trades: Secondary market transactions, 21 for prime brokerage accounts, interpositioning vs., 73 Secondary off erings, 7 123–124 and market makers, 79–80 SEC Regulation ATS, 56 and SEC, 108–109 Stocks: SEC Regulation NMS, 55–56 Securities Exchange Act of 1934, control, 11 SEC Rule 10b-18, 109–110 107–108 legend, 10 SEC Rule 11Ac1-1, 100–101 for tender off ers, 110–112 lettered, 10 SEC Rule 11Ac1-5, 54 for trading suspensions, 109 penny, 58, 113–114 SEC Rule 11Ac1-6, 55 uniform practice code, 119–123 restricted, 10, 11 SEC Rule 15c2-11, 41–43 for wrap accounts, 125 stopping, 28–29 SEC Rules 15g-2–15g-9, 113–114 Securities marketplace, 21–38 Stock splits, 28 SEC Rule 134, 4 and consolidated tape, 34–35 Stop limit orders, 24 SEC Rule 201, 33 exchanges as, 25 Stop loss orders, 22–23 Securities: order types in, 21–24 Stop orders, 22–23 borrowing, 31–32 pretest, 37–38 Stopping stock, 28–29 control, 11 role of specialists/DMMs in, Subject securities, 101 corporate, 1–19 25–29 Subscription levels (Nasdaq), covered, 54, 101 short sales, 29–34 40–41 exempt, 8–9 Self regulatory organizations Subsequent primary off erings, 7 fi xed income, 87 (SROs): Suspensions, trading, 109 industry rules and regulations defi ned, 108 Syndicate short positions, 86 for, 107–129 and threshold securities, 32 Syndication, 81–86 issuers repurchasing their own, Selling concession, 8 System hours expire time (SHEX), 109–110 Selling group, 8 50

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System hours good-till-cancelled Trade Reporting Facility (TRF), 73–79 for corporate securities, 6–7 (SGTC), 50 Trading: negotiated, 8 System hours immediate or cancel extended hours, 40 Underwriting activity reports (SIOC), 50 insider, 112 (UARs), 85–86 System orders, 49–50 unauthorized, 116 Underwriting commitments, Trading ahead, 116 6–7 T Trading halts, 80–81 Underwriting syndicate, 8 Tenders, partial, 111–112 Trading suspensions, 109 Undisplayed customer limit orders, Tender off ers, 110–112 Transactions: 72–73 Th ird market, 58–59 broker, 11 Uniform practice code, 119–123 Th ird-market reports, 78 exempt, 9–14 Unlisted trading privileges (UTP), Th reshold securities, 32–33 fourth market, 59 54 Tombstone ads, 4–5 investor-to-investor, 21 UPC Rule 11830, 122 TRACE (Trade Reporting and net, 99 Compliance Engine), 87–89 on primary market, 1 V TRACS (Trade Reporting and proceeds, 98 Violations: Comparison Service), 52 riskless principal, 98 backing away, 101 Trades: secondary market, 21 of Regulation T, 120–121 AWP, 76 third market, 58–59 Volume limitation, 11 step out, 73, 79–80 Transfers, asset, 14 Volume weighted average price Trade complaints, between TRF (Trade Reporting Facility), (VWAP), 34 members, 102 73–79 Voluntary withdrawal, of quotes, Trade dates, 120 Two-sided market, 39–40 68 Trade reporting, 73–79, 87–89 Two-sided quotes, 40 ACT/TRF, 73–79 W pretest, 91–93 U When-issued securities, 121 TRACE, 87–89 UARs (underwriting activity Withdrawal, of quotes, 68–69 Trade Reporting and Comparison reports), 85–86 Wrap accounts, 125 Service (TRACS), 52 Unauthorized trading, 116 Trade Reporting and Compliance Underwriting: X Engine (TRACE), 87–89 competitive bid, 8 X (extended hours) orders, 67

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