Series 57 cheat sheet

Regulation NMS Rule 611 (Order Protection Rule): a trading center may not execute at a price inferior to a protected quotation displayed by another market center; exceptions include intermarket sweep orders, flickering quotes, and the benchmark price exception.

NBBO is the highest displayed bid and lowest displayed offer across all trading centers for an NMS stock, consolidated by the SIPs; Rule 602 requires market centers to submit their best quotes.

US settlement is T+1 (trade date plus one business day) for equities, corporate bonds, municipal bonds, and unit investment trusts, effective May 2024; US Treasury securities also settle T+1.

Accrued interest: corporate and municipal bonds use a 30/360 day count; US Treasury notes and bonds use actual/actual.

Price and yield are inversely related: a bond trades at a premium when its coupon exceeds its yield to maturity and at a discount when the coupon is below the yield to maturity.

Conversion ratio = par value / conversion price; conversion value = conversion ratio x common stock price; a convertible trades at a premium to conversion value when the option value is positive.

Modified duration = Macaulay duration / (1 + y/k), where k is coupon frequency; estimated percentage price change = -modified duration x change in yield expressed in percentage points.

Regulation T initial margin is 50% of the purchase price for long marginable securities; FINRA Rule 4210 minimum maintenance for long equities is 25% of market value (short accounts: 30%).

Regulation SHO: Rule 203(b) requires a borrow or reasonable locate before accepting a short sale; threshold securities with fails of 10,000+ shares for five consecutive settlement days must be closed out within three settlement days.

Regulation NMS Rule 602 requires a registered market maker in an NMS stock to display a firm two-sided quotation continuously during regular trading hours, with limited exceptions such as a trading halt.

A firm quotation must be executable at the displayed price for at least the displayed size when an order arrives; a market maker cannot refuse the execution of an order that arrived while the quote was displayed.

Market maker economics: gross spread capture minus exchange fees (or plus rebates) minus adverse selection losses, hedging costs, and inventory carrying costs.

Maker-taker pricing pays a rebate (commonly $0.0020-$0.0030 per share) to the liquidity provider and charges a fee to the liquidity taker; inverted venues reverse the schedule.

FINRA Rule 5320 prohibits trading ahead of a customer order: a member holding an unexecuted customer order may not trade the same security for its own account at an equal or better price before filling the customer.

Volcker Rule: covered banking entities are barred from short-term proprietary trading and from acquiring covered fund interests, subject to exemptions for market making, underwriting, risk-mitigating hedging, and exempt activities.

The Volcker market-making exemption requires an authorized trading desk, documented market-risk limits, inventory and customer-facing justification, and no activity structured to evade the prohibition.

Options market making risk measures: delta hedges directional exposure, gamma measures change in delta, vega measures volatility sensitivity, theta measures time decay of premium.

Adverse selection (toxic flow) arises when informed counterparties trade against stale quotes, so executions systematically precede price moves against the market maker's resulting inventory position.

Series 57 qualifies an individual as a Securities Trader for proprietary trading of equity and convertible debt securities; registration requires sponsorship by a FINRA member firm and a Form U4 filing.

Market Access Rule (Exchange Act Rule 15c3-5) requires pre-trade financial and regulatory risk controls, including credit/capital thresholds, erroneous order prevention, and direct and exclusive control over market access.

FINRA Rule 2010 requires high standards of commercial honor and just and equitable principles of trade; Rule 2020 prohibits manipulative devices and contrivances in connection with securities transactions.

Exchange Act Rules 17a-3 and 17a-4 require books and records (including order tickets and communications) to be preserved for three years, the first two in an easily accessible place, with electronic records non-rewritable.

Trade reporting: executed equity trades must be reported to a FINRA Trade Reporting Facility within 10 seconds; corporate bond trades must be reported to TRACE within 15 minutes of execution.

FINRA Rule 5310 (best execution) requires reasonable diligence to ascertain the best market for a customer order and execution at a price as favorable as possible under prevailing market conditions.

Regulation Best Interest (Rule 15l-1) requires broker-dealers to act in the best interest of retail customers when recommending securities, satisfying care, disclosure, conflict of interest, and compliance obligations.

Rule 606 requires quarterly public reports disclosing order routing venues and payment for order flow relationships, plus customer-specific routing disclosures on request; Rule 607 covers payment for order flow.

Rule 10b-5 prohibits fraud and manipulation in connection with any securities purchase or sale; liability for trading on material nonpublic information also arises under the misappropriation theory.