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  • Series 56 Proprietary Trading Outline 0 comments
    May 7, 2013 12:19 PM

    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:
    17. converting dividend & distributing
    18. convert right offerings
    19. distribute information non non-U.S. developments
    20. Regulation M: unlawful to bid/offer during a restricted period
    21. Options
    22. American Exercise - Equity Options
    23. European Exercise - Index Options
    24. Expiration: Friday following third Saturday in the month
    25. can be traded until 4:15 on date of expiration
    26. Premiums
    27. underlying price
    28. strike price
    29. interest rate
    30. dividend
    31. expiration time
    32. volatility
    33. Delta - Change in option premium
    34. Gamma - change in delta
    35. Theta - time based change
    36. Vega - volatility based change
    37. In-the-money: 1 cent above strike price of underlying security
    38. out-of-the-money: at least 1 cent below strike price
    39. FX Options:
    40. Only Japanese Yen trades in 1,000,000 unit lots
    41. Other currencies in 10,000 or 100,000 denominations
    42. 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
    14. 2 years on site
    15. 3 years in an accessible place
    16. Chinese Walls
    17. Limits flow of information to individuals/ departments to comply.
    18. Front-Running - marking up customer price to profit off the spread
    19. Marking-the-close - placing a large number of buy/sell orders on the close
    20. 30-day wash sale - no claiming loss when same investment was purchased 30 days before/after sale date.
    21. Pre-arranged Trading - Creating the illusion of false volume
    22. 2005 - regulation SHO locate/close-out standards
    23. locate requirement - must locate borrow before shorting
    24. close-out requirement - must close out only if large number of delivery failure exists
    25. Threshold Securities - if delivery failures exist, no shorting these stocks.
    26. 5 day delivery failure
    27. 10,000 shares or .5% of outstanding stock fails to deliver
    28. 3 SHO Violations:
    29. selling without locate (naked short-selling)
    30. failure to deliver at settlement
    31. failure to deliver at settlement to drive price down
    32. B/D must mark every order as Long, Short, Short Exempt
    33. waiver can be granted by commission
    34. Best Execution - no middle man unless there is a benefit to the customer
    35. Considerations:
    36. lower price
    37. execution price
    38. probability that order gets filled
    39. Pace-time priority - order must be executed in the order in which they are received
    40. Do Not Trade List - go to compliance if you traded a stock on the list
    41. Limits - 6 months
    42. 20,000,000 shares OR 50,000 contracts
    43. 40,000,000 shares or 75,000 contracts
    44. 80,000,000 shares or 200,000 contracts
    45. 100,000,000 shares or 250,000 contracts
    46. Cabinet Trade - deep out of the money
    47. only contracts at .01 cent can be placed in cabinet
    48. Block-size
    49. At least 10,000 shares
    50. Market Value >$200,000
    51. Directed Order: Customer Dictated Route/Venue
    52. Sweep Order-
    53. Marketable limit order
    54. Buy order with limit price > national best offer @ time
    55. Protected bid/offer - displayed & protected price by Nasdaq
    56. 30-second response - execute whole order or quote limit size
    57. Market maker must make electronic reports monthly
    58. Locking / Crossing quotes
    59. Step Out - position transfer to another BD (no need to sell out and buy in a new account)
    60. Give-up - clearing will execute trade if b/d can't
    61. Options Exercise - 5:30 PM on day before expiration
    62. Exercise prior to ex-dividend date - must exercise prior to ex-dividend date to receive a dividend on the stock.
    63. Option settlement:
    64. next day - t+1
    65. equities - t+3
    66. unmatched options trades must be resolved by 9:15AM next day
    67. Contracts must be "exercised advice" by 4:20 PM or 5 minutes after the close if exempt
    68. OCC Assignment - randomly assigns contract exercise to clearing members holding stock
    69. Risk-based haircut - can't use full security capital for net capital
    70. Order Ticket Contains
    71. 1) Clearing firm (give up)
    72. 2) Clearing Symbols / Marks
    73. 3) Symbol
    74. 4) Date
    75. 5) Number of contracts/shares
    76. 6) Price
    77. 7) Account Number
    78. 8) Market Center
    79. 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)

    For Proprietary Trading Firm reviews, news, rumors & opinions, visit Proprietary Trading

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