Series 57 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

National Best Bid and Offer

The highest displayed bid and lowest displayed offer for an NMS stock across all trading centers, consolidated by the securities information processors; executions generally occur at prices no worse than the NBBO.

Trade-through

An execution of an order at a price worse than a protected quotation displayed by another market center; Regulation NMS Rule 611 generally prohibits trade-throughs, subject to specific exceptions.

T+1 settlement cycle

US equities, corporate bonds, municipal bonds, and unit investment trusts settle one business day after the trade date, replacing the prior T+2 cycle starting in May 2024.

Accrued interest day counts

Corporate and municipal bonds accrue interest on a 30/360 day-count basis, while US Treasury notes and bonds use an actual/actual day count for accrued interest and pricing purposes.

Conversion ratio

The number of common shares a convertible security converts into, calculated as par value divided by the conversion price; multiplying the ratio by the stock price yields conversion value.

Modified duration

A bond's price sensitivity to yield changes, equal to Macaulay duration divided by one plus yield over coupon frequency; estimated price change equals minus modified duration times yield change.

Regulation T initial margin

The Federal Reserve requirement that an investor deposit at least 50 percent of the purchase price when buying marginable securities on credit through a broker-dealer.

Maintenance margin requirement

The minimum equity an investor must maintain after purchase, set by FINRA Rule 4210 at 25 percent of long market value for equity securities and 30 percent for short positions.

Locate requirement

Under Regulation SHO Rule 203(b), a broker-dealer must borrow the security or have a reasonable basis to believe it can be borrowed before accepting a short sale order.

Threshold security

A security placed on a list after fails to deliver of 10,000 shares or more persisted for five consecutive settlement days; resulting fails must be closed out within three settlement days.

Current yield

Annual coupon interest divided by the bond's current market price; it measures income return only and ignores any capital gain or loss realized at maturity.

Firm quotation

A displayed bid or offer that a market maker must honor for at least the quoted size; the executing party is protected up to the size displayed when the order arrived.

Adverse selection

The risk that a market maker's quotes are hit or lifted by better-informed counterparties, so resulting trades tend to move against the market maker's position and erode spread profits.

Maker-taker pricing

An exchange fee model paying a rebate, often two to three tenths of a cent per share, to the order posting liquidity, and charging a fee to the order that removes liquidity.

Spread capture

Gross trading profit measured by the difference between the prices at which a market maker buys and sells, before exchange fees, hedging costs, and adverse selection losses are deducted.

FINRA Rule 5320

Prohibits trading ahead of customer orders: a member holding an unexecuted customer order in a security may not trade that security for its own account at an equal or better price first.

Volcker Rule

Dodd-Frank provision barring covered banking entities from short-term proprietary trading of securities and from owning covered fund interests, subject to exemptions such as market making and underwriting.

Market-making exemption

Volcker exception permitting principal trading only where the desk is authorized, documented risk limits apply, and activity is genuinely customer-oriented rather than structured to evade the proprietary trading ban.

Delta

The change in an option's price for a one-dollar move in the underlying security; it also approximates the number of underlying shares needed to hedge the option position.

Gamma

The rate of change of an option's delta as the underlying price moves; high gamma forces frequent rebalancing of the hedge, increasing hedging costs for the market maker.

Inventory risk

The exposure a market maker bears from holding a long or short position that may lose value before it is hedged or unwound; quotes are skewed to reduce the position.

Series 57 registration

The FINRA qualification for proprietary traders of equity and convertible debt securities; candidates must be sponsored by a member firm and pass the exam as part of registration.

Form U4

The uniform registration application filed with FINRA that discloses employment history and statutory disqualification information; material changes must be reported promptly, generally within 30 days.

Market Access Rule 15c3-5

SEC rule requiring broker-dealers with market access to apply pre-trade risk controls, including credit and capital thresholds and erroneous order checks, before orders reach a trading center.

FINRA Rule 2010

Requires members and their associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

Rule 10b-5

SEC rule prohibiting fraud, misrepresentation, and manipulation in connection with the purchase or sale of any security; it is the principal basis for insider trading enforcement.

Misappropriation theory

A theory imposing insider trading liability on a person who trades on confidential information in breach of a duty owed to the source of that information, constituting Rule 10b-5 fraud.

Regulation Best Interest

SEC rule requiring broker-dealers to act in the best interest of retail customers when recommending securities, satisfying care, disclosure, conflict of interest, and compliance obligations.

Best execution Rule 5310

FINRA rule requiring members to use reasonable diligence to ascertain the best market for a customer order and to execute at a price as favorable as possible under prevailing market conditions.

Rule 606 disclosures

Requires broker-dealers to publish quarterly reports on order routing venues and payment for order flow arrangements, and to provide customer-specific routing information upon request.

Record retention Rule 17a-4

Exchange Act rule requiring broker-dealers to preserve required books and records for three years, with the first two easily accessible, and to keep electronic records in a non-rewritable format.

Consolidated Audit Trail

SEC Rule 613 system requiring self-regulatory organizations and their members to report order lifecycle events, including origination, routing, modification, cancellation, and execution, to a central repository.