Series 56 Study Guide Outline

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Section 1

  1. Form U5 – must be submitted within 30 days of termination from the firm
  2. Only the SEC can reinstate a CRD that has a statutory disqualification
  3. Continuing Education
  4. Firm Element – Program to be updated every year
  5. Regulatory Element – 2 years, 3 years after that.
  6. Gifts:
  7. $50 maximum to any member of an exchange in any given year
  8. $100 maximum to any broker, dealer or institution in any given year
  9. Prior written consent must be given for another firm to access an account
  10. Price guarantees are always illegal.
  11. Profit-sharing agreements
  12. written consent is needed
  13. payout must be directly related to contribution
  14. cannot be changed at any time
  15. Records:
  16. Business establishment records must be kept on file for lifetime
  17. all transactions must be kept for 3 years in an easily accessible place
  18. all transaction must be accessible for 6 years

Section 2

  1. Auction Market
  2. Bids (buyers) & Offers (sellers)
  3. real time
  4. bids/offers matched for sale
  5. Broker – Trades the account of others
  6. Dealer – Trading own account through the broker
  7. Open-end investment
  8. issues more shares
  9. based on net value of shares
  10. sell back to fund Closed-end investment
  11. Closed-end investment
  12. Fixed # of shares
  13. Market pricing / supply & demand pricing
  14. Open Market
  15. SRO – Self Regulatory Organization
  16. cannot send someone to Jail.
  17. established in securities act of 1934
  18. FINRA – Member Funded – No Funding From SEC
  19. OCC – Options Clearing Corp
  20. Becomes the buyer for every seller and the seller for every buyer
  21. DTCC – Depository Trust Clearing Corp.
  22. DTCC – Clears equities / bonds
  23. DTC – Subsidiary of DTCC – provides settlements
  24. DTC Services
  25. Custody & safekeeping
  26. underwriting
  27. deposit & withdrawal
  28. Dividend, reorganization, proxy
  29. restricted family services
  30. Direct Registration Service
  31. Market-maker: makes transactions as dealer-specialist on exchange
  32. SEC Definition: ready to buy/sell at quoted price on a regulator basis
  33. Designated market-maker has no obligation to display quotes

Section 3

  1. Dividends
  2. Declaration Date – Inform public of dividend intent
  3. Record Date – Record shareholders who will be paid
  4. Ex-dividend Date – Date by which the stock must be purchased in order to receive a dividend
  5. Stock Splits
  6. Reverse Stock Splits
  7. Preferred Stock
  8. Voting Rights
  9. Dividend Priority
  10. Payment Priority in a liquidation
  11. ETF Electronically Traded Fund
  12. Broad-Based ETFs
  13. Narrow-Based ETFs
  14. Operation unit typically 50,000 shares
  15. ADR – American Depository Receipts (Foreign Stocks)
  16. Institution responsibilities:
    1. converting dividend & distributing
    2. convert right offerings
    3. distribute information non non-U.S. developments
  17. Regulation M: unlawful to bid/offer during a restricted period
  1. Options
  2. American Exercise – Equity Options
  3. European Exercise – Index Options
  4. Expiration: Friday following third Saturday in the month
  5. can be traded until 4:15 on date of expiration
  6. Premiums
  7. underlying price
  8. strike price
  9. interest rate
  10. dividend
  11. expiration time
  12. volatility
  13. Delta – Change in option premium
  14. Gamma – change in delta
  15. Theta – time based change
  16. Vega – volatility based change
  17. In-the-money: 1 cent above strike price of underlying security
  18. out-of-the-money: at least 1 cent below strike price
  1. FX Options:
  2. Only Japanese Yen trades in 1,000,000 unit lots
  3. Other currencies in 10,000 or 100,000 denominations
  4. Shorts – locate must be documented and approved before order entry

Section 4

  1. Options Principal = Series 4
  2. Options Disclosure Agreement Needed
  3. OPRAH – Options Price Reporting Authority
  4. Clearing Agency
  5. Securities that may be transferred or loomed
  6. DTCC in this case
  7. Inducing purchase of sale by others is illegal
  8. Dissemination of information as to rise & fall of securities prices
  9. No lining bids at the close
  10. pegging/fixing/stabilizing
  11. Anti-Money Laundering (AML)
  12. Every year 3rd party must validate
  13. must maintain signed principal record
    1. 2 years on site
    2. 3 years in an accessible place
  14. Chinese Walls
  15. Limits flow of information to individuals/ departments to comply.
  16. Front-Running – marking up customer price to profit off the spread
  17. Marking-the-close – placing a large number of buy/sell orders on the close
  18. 30-day wash sale – no claiming loss when same investment was purchased 30 days before/after sale date.
  19. Pre-arranged Trading – Creating the illusion of false volume
  20. 2005 – regulation SHO locate/close-out standards
  21. locate requirement – must locate borrow before shorting
  22. close-out requirement – must close out only if large number of delivery failure exists
  23. Threshold Securities – if delivery failures exist, no shorting these stocks.
    1. 5 day delivery failure
    2. 10,000 shares or .5% of outstanding stock fails to deliver
  24. 3 SHO Violations:
    1. selling without locate (naked short-selling)
    2. failure to deliver at settlement
    3. failure to deliver at settlement to drive price down
  25. B/D must mark every order as Long, Short, Short Exempt
  26. waiver can be granted by commission
  27. Best Execution – no middle man unless there is a benefit to the customer
  28. Considerations:
    1. lower price
    2. execution price
    3. probability that order gets filled
  29. Pace-time priority – order must be executed in the order in which they are received
  30. Do Not Trade List – go to compliance if you traded a stock on the list
  31. Limits – 6 months
  32. 20,000,000 shares OR 50,000 contracts
  33. 40,000,000 shares or 75,000 contracts
  34. 80,000,000 shares or 200,000 contracts
  35. 100,000,000 shares or 250,000 contracts
  36. Cabinet Trade – deep out of the money
  37. only contracts at .01 cent can be placed in cabinet
  38. Block-size
  39. At least 10,000 shares
  40. Market Value >$200,000
  41. Directed Order: Customer Dictated Route/Venue
  42. Sweep Order-
  43. Marketable limit order
  44. Buy order with limit price > national best offer @ time
  45. Protected bid/offer – displayed & protected price by Nasdaq
  46. 30-second response – execute whole order or quote limit size
  47. Market maker must make electronic reports monthly
  48. Locking / Crossing quotes
  49. Step Out – position transfer to another BD (no need to sell out and buy in a new account)
  50. Give-up – clearing will execute trade if b/d can’t
  51. Options Exercise – 5:30 PM on day before expiration
  52. Exercise prior to ex-dividend date – must exercise prior to ex-dividend date to receive a dividend on the stock.
  53. Option settlement:
  54. next day – t+1
  55. equities – t+3
  56. unmatched options trades must be resolved by 9:15AM next day
  57. Contracts must be “exercised advice” by 4:20 PM or 5 minutes after the close if exempt
  58. OCC Assignment – randomly assigns contract exercise to clearing members holding stock
  59. Risk-based haircut – can’t use full security capital for net capital
  60. Order Ticket Contains
  61. 1) Clearing firm (give up)
  62. 2) Clearing Symbols / Marks
  63. 3) Symbol
  64. 4) Date
  65. 5) Number of contracts/shares
  66. 6) Price
  67. 7) Account Number
  68. 8) Market Center
  69. All exchange transactions must clear through corporation and no other transactions without the consent of the exchange

Section 5

  1. Facilitation Order: only to be executed in cross-transaction
  2. all accepted bid/offer on exchange constitute a binding contract
  3. Public Customer Interest – Can’t manipulate price by taking same side in stock & option
  4. Spread – no more than:
  5. < $2 = $0.25
  6. < $5 = $0.40
  7. < $10 = $0.50
  8. < $20 = $0.80
  9. > $20 = $1
  10. Halt – Down 10% in a 5 minute bar
  11. Fair Markets – must take action in best interest of fair & orderly markets
  12. Trading Hours – 9:30 AM – 4 PM EST (Eastern Standard Time)
  13. ATS – Alternative Trading System (I.E. ECNs)
  14. Outside of normal hours
  15. Between 9:30 AM = 4:00 PM – 30 seconds
  16. 6:30 PM – Midnight = 8:15 AM marked as/of
  17. Midnight – 8 AM = 8:15 AM next day
  18. Public Customer Order – Orders executed by time arrived if price is the same
  19. Prohibition on payments for market making
  20. no payments to brokers to manipulate how orders are entered.

Additional Terms & Concepts

– OCC is the option clearing court & it clears the options

– OPRAH is the market data for options

The supervision for this is the regulators options principal (series 24)

Anybody who wants to trade options is called the options disclosure document

– Cash Settlement for options – cash same day, 2:00 is the last time you can do a trade, 2:30 is the cutoff time for delivery of that money

Regular settlement for options is the next day

– Fail to deliver = 13 days (10 + 3 = 13)

– Register Principal – CEO and CCO are the people of authority in the equities section, for options it is the ROP (Series 4)

Trading times are 9:30-4:00 pm Eastern Standard Time (Central Time is 1 hour behind Eastern)

Broad based index option is 9:30-4:15 pm Eastern Standard Time

Options expiration is the 3rd Friday of the month at 4:00 pm & this is your last trade of expiration

The 3rd Saturday at 11:59pm (following the 3rd Friday) is the last time you can exercise an option

– Option Contract Settlement – stock delivery of the option is T + 3 (if you exercise it takes 3 days)

When you are in the money by at least a penny at expiration there will be an automatic exercise

Currency options follow the same rules at equity options

A call = buy = long = hold = position creates a debit spread = right to buy

A put = sell = short = writing it = position creates a credit spread = right to sell

At Expiration there are 3 choices:

  1. Exercise the option
  2. Let it expire – When long call is greater than or equals to the market price you buy the strike price, when less than the market price you sell the strike price
  3. Sell the option before the expiration date – you get the premium
Position Maximum Gain Maximum Loss
Long Call Unlimited Premium
Short Call Premium Unlimited*
Long Put Strike Price – Premium Premium
Short Put Premium Strike Price – Premium

*Reg T = 100% margin requirement

Continuing education after first 2 years, every 3 years it must be done

– AML = occurs once a year & must be documented

You don’t report marriage for the U4

All options outside of Japan is 10,000

– Japanese contracts are 1,000,000

– 1 point premium = $100

If bullish – buy calls or sell puts

– Exchange traded options are also known as listed options

– Eastern account (key words) – unsold, undivided

– Western account (key words) – sold, divided

Regulation SP is the privacy act = privacy of customers information

Time reporting of trades

  1. Dot T = Trade modifier, trades places outside normal business hours
  2. As/of = reported next day at 8:15
  3. ACT = 20 minutes for trade confirms

– Nasdaq pink sheets, 3rd market bulletin board = 30 seconds

– Only sell side reports on ACTs (only sellers)

12 midnight – 8 am = dot T

– Must be reported between 8 and 8:15

8 – 9:30 = 30 seconds

9:30 – 4pm = 30 seconds

4 pm – 8 pm = dot T

8 pm – 12 midnight = as/of

4 questions each for Act of 33 and Act of 34

– 1933 = must be filed with SEC, prevents fraudulent activity

– 1934 = secondary trading, prevents fraudulent practices, more oversight with the SROs

Know the books & records

– P&S – when money is sent, it must be posted within 24 hours

– Transfer Agent – for a corporation, responsible for issuing securities in correct name

– Right – short term, price below market price, may trade with or separate with common stock

– Warrant – long term, price higher than market price, may trade with or separate with units

– Warrants are offered as sweeteners

– Factors that affect premium – volatility, time left, intrinsic value, interest rate

– Option closing transactions – if opened by buying then you close by selling (& vice versa)

 

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