If a broker dealer accepts customer limit orders it is required to protect the order and may not trade for its own account at prices that would satisfy the customer’s limit order. The order protection rule is also known as the Manning rule. The Manning rule states that a firm may not compete with a customer’s limit order by executing an order for its own account at a price that would satisfy the customer’s limit. If the firm executes an order for its own account at a price that would satisfy the customer’s limit order, the firm must execute the customer’s order at the same price and for the same number of shares within 60 seconds.Broker dealers that route orders to ECNs or other firms to be displayed must still protect the customer’s limit order and are not relieved of their obligations under the Manning Rule. If the market-making desk is holding a customer’s limit order that is subject to the Manning Rule, no trading desk anywhere within the firm may knowingly execute a proprietary order that would compete with the customer’s order. If the firm has sufficient barriers between its trading desks and the other desk does not have knowledge of the customer’s order, the other desks are not bound by the Manning Rule.

This is definitely a testable question on the Series 57 exam. The timely reporting of transactions is critical for market integrity. All transactions are required to be reported as soon as practicable, but not later than 10 seconds after execution . If a transaction is executed and later cancelled under FINRA trade reporting rules the firm is required to report the transaction promptly. The trader is then required to use the ACT trade scan to cancel the transaction. The trade cancellation report should be made on the same day as the trade was reported provided the trade reporting facility is still open. This rule is in effect for transactions executed during normal business hours as well as for those trades executed during extended hours trading.

A discretionary range order gives the trader the ability to execute a customer’s limit order within an acceptable range of prices. Discretionary range orders provide flexibility to the trader to adjust the order to current market conditions. Providing a range of acceptable limit prices rather than 1 firm fixed limit price increases the chances that the customer’s order will be executed. It is important to remember that a customer’s limit order may never be executed at an inferior price. For example If a customer placed an order to sell 5,000 shares of TRY at $42, the firm would not be able to execute that order at a price less than the stated limit price. This is true even if the trader feels that doing so would be in the best interest of the client. A discretionary range order would provide the trader with the ability to execute the order within a range of prices which are inferior to the desired limit price. If in our example the customer who wants to sell the TRY at $42 provided the trader with discretionary trading range of 25 cents, the trader would be allowed to execute the order at any price of $41.75 or higher. The trader may enter the discretionary range order as a limit order. It will be displayed at the limit price of $42. When entering the order in the NASDAQ system, the trader will append the discretionary range of 25 cents to the order. If a contra bid shows up within the range of acceptable prices the NASDAQ system will execute the order. Using our example, if a bid of $41.80 appeared in the market place the order would be executed at that price.

The operation of the CATS system is definitely an area you want to have down cold. CATS plays a vital role in market surveillance and it is heavily tested on the series 57 exam. In order to ensure that customer orders are transmitted to the marketplace in a timely manner, FINRA developed the Consolidated Audit Trail system (CATS). CATS tracks an order through each stage of its life, from receipt to execution or cancellation. The CATS system has replaced the Order Audit Trail or OATS system previously used to track customer order information. The CATS system is often still referred to as OATS in the industry and may appear as OATS on your exam. Each firm is required to synchronize clocks used for electronic order events to within 50 milliseconds of the National Institute of Standardized Time’s atomic clock. These clocks must display and record military time in hours, minutes, seconds and milliseconds. Each clock used solely for manual order events may be synchronized to a tolerance within 1 second of the NIST clock. Each member may record and submit manual order events and allocation reports to the Central Repository in increments of 1 second. Firms are only requested to collect and submit data in nanoseconds if the firm collects the data. Firms are required to submit daily electronic CATS reports to FINRA’s Central Repository. The business day for CATS is 4:150:00:01 p.m. to 4:15 p.m. the following business day. CATS reports must be made by 8 a.m. on T+1 on the business day following the trade date. For trades executed on Friday, CATS reports may be submitted on Saturday but must be submitted by 8 a.m. Monday morning. Daily CATS reports must be made for each order and include the following information:

• Customer name, account number, date of birth, address and tax ID.
• Date and time of receipt.
• Order ID.
• Terms of the order (i.e. buy, sell, long, short, security, price, shares, account type and handling instructions).
• If the order was received manually or electronically.
• If the order was routed manually or electronically
• Where the order was routed for execution.
• Any modifications to the order, including the date and time of any modifications.
• Execution information, including partial executions, price, date, time, and capacity in which the firm acted in the trade.

The NASDAQ and the OTC markets have multiple venues for executing orders. Each of these require trades to be reported using the proper “input screen". These are user interfaces. It will help you to think of the TRF, ORF and TRACS as nothing more complicated than the order screen you use when placing an order online. The vast majority of transactions will be reported using the Trade Reporting Facility or TRF. The FINRA/Nasdaq Trade Reporting Facility (TRF) is a trade comparison service operated on the ACT platform. It has been designed to greatly reduce questionable trades and trades that one party does not know (DKs). The TRF facilitates the reporting and clearing of trades in Nasdaq and the NYSE listed stocks executed off the floor in the third market. Trades executed on the exchanges do not get reported using the TRF and are NOT reported to the ACT system.

The order reporting facility (ORF) is used to report trades in OTC MKT, OTC PINK and trades in restricted stock under Rule 144A to the NSCC. The “O” in the ORF is a great way to remember the ORF is used for OTC non nasdaq transactions.

The Trade Reporting and Comparison Service (TRACS) collects trade information for market participants who use the ADF. FINRA established TRACS to assist in the reporting of trades for ADF market participants who are not eligible to use the Nasdaq Market Center Trade Reporting Service or ACT. ADF market participants who are also market makers may choose to report trades executed through the ADF either through ACT or the TRACS systems. The TRACS system works in much the same way as ACT. However, the TRACS system will allow ADF market participants to report a three-party trade to assist in the reporting of riskless principal trades. The TRACS system reports trades to the Depository Trust Clearing Corporation (DTCC) and reports the trade to the appropriate securities information processor for public dissemination. FINRA may terminate the TRACS service upon notice to members who fail to abide by the rules of FINRA or the TRACS service.

Broker dealers have an affirmative obligation to obtain the best possible prices for clients. When customers are buying stock broker dealers must execute the customer’s order at the best ( lowest ) offer price available at the time. Alternatively, when customers are selling stock, the firm must execute the customer’s order at the best  ( highest ) bid price available at the time. Provided the prices available meet any limit prices on the customer’s order. It is a violation of industry standards to execute a customer’s order at any price deemed to be inferior to the best price. The inside market for a stock consists of the Highest Bid and Lowest Offer displayed by any firm or in any market.. A broker dealer may never place a third party in between the customer and the best market. This is known as Interpositioning. The placing of another broker dealer in between the customer and the best marke.is prohibited unless it can be demonstrated that the customer received a better price because of it.. Here is an example of interpositioning.

A customer gives Broker an order to buy 3,000 shares of ABCD when the stock is quoted $3.75 X $4.25. Instead of buying the stock for their customer Broker A sends the order to Broker B who buys the stock at $4.10, Broker B then sells the stock to Broker A at $.4.15 and Broker A then sells the stock to the client at $4.25 plus a mark up. As a result both Broker A and B made money and the customer paid more than he / she should for the stock.

Bond yields can be a sticking point for many SIE candidates. Understanding the inverse relationship between price and yield is only the first step to mastering this content. Knowing how the nominal yield, current yield, yield to maturity and in some cases how yield to call relate to one another are essential. The bond see saw is a time tested way to ensure you can handle these questions on your SIE Exam. Practice drawing it out for each possible scenario. This will make these questions visual and in most cases simple. All you have to do is look at the drawing and you will be able to quickly answer the questions on your actual SIE exam. Create the seesaw with bonds at a discount, when purchasing bonds at par and when bonds are purchased at a premium and you will be in good shape. It is important to note that the nominal yield never changes. It is printed in ink on the bond certificate . Your current yield is a relationship between the annual interest payments and the price the investor pays for the bond. Once the investor purchases the bond he /she has locked in their current yield The formula is always Annual Income / Current Market Price. An investor’s yield to maturity is the overall return for purchasing the bond; it takes into account the Annual interest payments with the assumption that they are reinvested at the same rate ( not spent by the owner of the bond) and any gain or loss at maturity. For bonds purchased at a discount the investor will have a gain. For a bond purchased at a premium the investor will  have a loss. Don’t worry you will not have to calculate the yield to maturity. If a bond is callable the yield to call will be the highest yield for a bond purchased at a discount and the lowest for a bond purchased at a premium.

Both front running and trading ahead are violations. Both are based on trading using advanced knowledge and the violations are often confused as a result. Front running is the entering of an order for the account of an agent or firm prior to the entering of a large customer order. For example, let's say that a representative received an order from an institutional investor to purchase 500,000 shares of DEF. Prior to entering the order to purchase the large amount of stock, the representative enters an order to purchase 1,000 shares of DEF. for themselves.. After purchasing the share for their own account the representative enters the order to buy 500,000 shares of DEF for the institutional customer. This large order drives the stock price up and the rep sells their shares at a profit.

Trading ahead is the entering of an order for a security based on the prior knowledge of a soon to be released research report. Research reports can have a substantial impact on the price of the stock covered in the report. This is particularly true when the analyst has a large following. It is not uncommon for the price of a stock to move up or down by 10 percent or more on the day the report is released. Questions on the exam often provide scenarios where a rep walks into an elevator and overhears a conversation between two analysts about a report they are going to release with a price target on a stock significantly higher than its current market price. The rep then returns to his or her desk and buys the stock for clients and themselves.. This is a classic example of trading ahead.

The level of interest rates are determined by a number of factors. Including:

• The level of economic activity.
• The supply and demand for capital
• The level of risk perceived to be in the market.

The money supply is controlled by the Federal Reserve Board largely through open market operations. Open market operations consist of the FRB buying and selling Treasury and mortgage backed securities in the secondary market. When the Fed buys securities it increases the money supply and lowers rates. This has a stimulating effect on the economy. When the FRB is a net seller of securities it is removing money from the banking system and interest rates will increase as a result. The discount rate is the interest rate that the Federal Reserve Board charges member banks on loans made directly by the FRB. The Federal Funds rate on the other hand is the rate banks charge each other for short term loans. These loans are typically overnight or for short periods of time. The Federal funds rate is NOT controlled by the Federal; Reserve Board.  The actual rate is determined by the marketplace. The Fed does set a range or target for what it thinks the fed funds rate should be. However, the borrowing and lending banks ultimately determine the rate.

Accumulation units and annuity units both  represent an investor’s ownership in the separate account. However, the units are owned during different phases of the annuity contract. An accumulation unit represents the investor’s proportionate ownership in the separate account’s portfolio during the accumulation or deferred stage of the contract. The value of the accumulation unit will fluctuate as the value of the securities in the separate account’s portfolio changes. As the investor makes contributions to the account or as distributions are reinvested, the number of accumulation units will vary. An investor will only own accumulation units during the accumulation stage, when money is being paid into the contract or when receipt of payments is being deferred by the investor, such as with a single-payment deferred annuity. When an investor changes from the pay-in or deferred stage of the contract to the payout phase, the investor is said to have annuitized the contract. At this point, the investor trades in the accumulation units for annuity units.

The number of annuity units is fixed and represents the investor’s proportional ownership of the separate accounts portfolio during the payout phase. The number of annuity units that the investor receives upon annuitizing a contract is based on the payout option selected, the annuitant’s age and sex, the value of the account, and the assumed interest rate.

A lot of people get tripped up on this very point. The difference between the 5 and 10 percent rule is an important difference. The goal of diversification is to reduce risk by spreading investments over many different holdings. Mutual funds are designed to help investors achieve diversifications through a single investment in the fund. Mutual funds that market themselves as diversified funds must adhere to the 75-5-10 rule.  the requirements are as follows:

• 75%: Seventy-five percent of the fund’s assets must be invested in securities of other issuers. Cash and cash equivalents are counted as part of the 75 percent. A cash equivalent may be a Treasury bill or a money market instrument.
• 5%: The investment company may not invest more than 5 percent of its assets in any one company.
• 10%: The investment company may not own more than 10 percent of any company’s outstanding voting stock.

Let's look at an example to help you understand this concept better:
XYZ fund markets itself as a diversified mutual fund. It has $10,000,000,000 in net assets. The fund’s investment adviser thinks that the ABC Company would be a great company to acquire for $300,000,000. Because XYZ markets itself as a diversified mutual fund, it would not be allowed to purchase the company, even though the price of $300,000,000 would be less than 5 percent of the fund’s assets. The investment company must meet both the diversification requirements of 5 percent of assets and 10 percent of ownership in order to continue to market itself as a diversified mutual fund.

This can be a bit confusing for test takers. While mutual funds and UITs are both types of investment companies and both are registered under the Investment Company Act of 1940 a UIT is NOT a mutual fund. A Unit Investment Trust is a non managed pooled investment. A unit investment trust (UIT) will invest either in a fixed portfolio of securities or a nonfixed portfolio of securities. A fixed UIT will traditionally invest in a large block of government or municipal debt. The bonds will be held until maturity, and the proceeds will be distributed to investors in the UIT. Once the proceeds have been distributed to the investors, the UIT will have achieved its objective and will cease to exist. A nonfixed UIT will purchase mutual fund shares in order to reach a stated objective. A nonfixed UIT is also known as a contractual plan. Both types of UITs are organized as a trust and operate as a holding company for the portfolio. UITs are not actively managed, and they do not have a board of directors or investment advisers. Both types of UITs issue units or shares of beneficial interest to investors, which represent an undivided interest in the underlying portfolio of securities. UITs must maintain a secondary market in the units or shares to offer some liquidity to investors.

Every transaction in the market consists of 2 parties: a buyer and a seller. No one would be able to buy a stock, bond or option if another party was not willing to sell it to them. The purchaser of the put is absolutely bearish and is betting that the stock price is going to fall. The put buyer pays the premium to acquire the right to sell the stock at the strike price. The premium is paid to the seller of the put contract. In exchange for the premium, the seller takes on an obligation to purchase the stock. Because the seller is now obligated to purchase the stock, the seller is considered to be bullish on the price of that stock. If the seller was bearish and thought the stock price was likely to decline they would not want to buy the stock and would not sell a put. Commit this to memory, the right to sell is bearish and an obligation to buy is bullish.

Most Bonds are designed to provide investors with regular interest payments and are most suitable for investors who have an income investment objective. Matching the particular type of bond to the investor’s profile is the key to answering the questions correctly. In the question there will be keys that help you identify which bond is the most appropriate and therefore correct choice. Key factors include such things as are they looking for maximum income or safety of principal. If they are seeking maximum income corporate bonds are going to be the best choice. Investors who are seeking safety of principal should be placed in the highest rated bond choice in the question. Treasury securities are often the correct choice here. Keep in that shorter term investments carry less interest rate risk. For the most risk adverse investors a money market fund may be the correct choice. There is no market risk and the money market fund will provide some level of income. Treasury bills are not the correct choice for investors seeing income. Remember that Treasury bills are issued at a discount and mature at the par value. Municipal bonds are best for investors who have an income objective but who do not want to incur additional tax obligations. Investors in higher tax brackets benefit the most from investments in municipal bonds. Investors who are in lower tax brackets will be better off investing in corporate bonds of equal quality.

Corporations declare forward and reverse stock splits for very different reasons. When the price of a stock increases to the point where the price makes it too high for many retail investors to purchase a round lot ( typically 100 shares) corporations will often declare a forward stock split. The impact of the forward stock split reduces the market price of the stock making it more attractive to individual investors. For example, let's assume XYZ is tracking in the market at $100 per share and the company declares a  2 for 1 split. As a result of the split XYZ will now be priced at $50 per share. Making it more attractive to individual investors. An investor who owned 100 shares of XYZ before the split value at $100 per share would now own 200 shares of XYZ valued at $50 each. The value of their holdings would not change. Their ownership would be valued at $10,000 before and after the split. To calculate the ownership take the number of shares and multiply it by the split as a fraction 2/1 and you multiply the share price by the reciprocal of the split as a fraction ½. If they are going to test you on an uneven split it will probably be a  3:2 split. Reverse splits on the other hand are effected to increase the price of a stock to make the stock more attractive to institutional investors. Many institutions do not want to purchase shares of stock trading below $5 or $10 per share. In these cases the reverse stock split reduces the number of shares and increases the market price of the stock For example, If ABC was trading in the market at $4 per share and ABC declared a 1 for 10 reverse split ABC would now be trading in the market at $40 per share. An investor who owned 1,000 shares at $4 per share before the split would now own 100 shares at $40 each. The value of the investor’s holdings remained unchained. Their ownership is $4,000 before and after the split.