Securities Order Placement and Trading Practices

• The chapter covers mechanics of placing orders for securities
• Discusses the implications of order types
• Discusses acceptable and unacceptable sales and trading practices
• Introduces functions like settlement and delivery, and securities transfer

Learning Objectives

• Understand trade components & how to place orders
• Recognize implications of order types
• Understand rules and requirements for sales and trading
• Identify acceptable and unacceptable sales practices
• Understand trade settlement, securities transfer and error handling

Key Terms

• All key terms are printed in bold in the glossary
• all-or-none order, ask price, best-efforts basis, bid price, churning, client priority rule, day order, fails
• fill-or-kill order, firewall, frontrunning, gatekeeper, grey or watch list, inside information
• insider trading, limit order, market order, material information, minimum quotation spread, odd lot
• restricted list, short sale, standard trading unit, stop-loss, suspicious transaction, settlement, tipping, and wash trade

How Securities are Traded

• Understanding securities trading mechanics requires comprehending the standard trading unit, settlement period, and minimum quotation spread

Standard Trading Units

• UMIR defines the standard trading unit quantity
• CIRO rules specify trading units for debt, unlisted securities
• Orders to buy/sell not in multiples of standard units are odd lots

Standard Trading Units (TSX and TSX V)

• Less than $0.10 per unit has a Standard Trading Unit is 1,000 units with Unit Odd Lot 1 to 999 units
• At $0.10 or more per unit and less than $1.00 per unit has a Standard Trading Unit of 500 units with Unit Odd Lot 1 to 499 units
• At or more than $1.00 per unit has a Standard Trading Unit 100 units with Unit Odd Lot 1 to 99 units
• Standard Trading Units are more difficult to fill than odd lots
• Traders can discount odd lot purchases and make premium on odd lot sales
• Clients can get less money selling odd lots and pay more when buying them

Settlement Period

• Trade settlement is transferring securities to buyer's account and cash to seller's after a stock, bond, futures, or financial asset sale
• The settlement period is the time between transaction and ownership transfer dates
• This timeframe varies by security type
• Most securities settle one business day after the trade date
• As of 2024, North American capital markets reduced settlement cycle for most securities trades from T+2 to T+1

Regular Settlement Periods

• Government of Canada (GOC) Treasury Bills (T-bills) settle at T+0
• Bonds (e.g. Government and corporate) settle at T+1
• Preferred and common shares settle at T+1
• T = Trade date
• T + 0 = Same-day settlement
• T + 1 = Trade date plus one business day

Minimum Quotation Spreads

• Clients get bid price, the highest amount someone will pay, when securities are sold at market value
• Clients pay the ask price when buying securities at market value; this is the lowest price a seller will accept
• The minimum quotation spread is the lowest acceptable margin between securities' bid and ask prices
• This range is set by exchanges

Minimum Quotation Spreads (TSX and TSX V)

• Security Selling Under $0.50 has a Minimum Quotation Spread of $0.005
• Security Selling $0.50 and over has a Minimum Quotation Spread of $0.01
• If stock's minimum market quotation spread is one cent, bid and ask prices must be at least that far apart
• Forexample, $2.34 (bid) and $2.35 (ask).

Placing an Order

• Computerized trading changed order placement methods & varied them amongst dealer members
• It is key RRs ensure order submissions and compliance with industry & firm procedures
• Client must verify order accuracy for non-discretionary accounts
• Complete an order ticket for purchase & sale instructions following rules enforced of provincial authorities, exchanges, & CIRO
• Do not pass orders to the trading desk without an order ticket
• The order ticket must contain client's name/account number
• It should contain the the security(s)' quantity & description, usually shown as a symbol
• A designation per price like limit, market or on-stop
• Order type designation (PRO, N-C, EMP)
• Notation whether an order is for discretionary account or short sale

Placing an Order cont.

• Accurate, clear order forms are essential to minimize mistakes
• Key Order Error Avoidance Guidelines:
• The information being entered needs to be clear
• Each buy & sell order is echoed back to the client
• When unclear, look up for stock codes or spell out the security name
• Before sending to trading desk: make sure the order is coded correctly, that buy/sell ticket is for right stock

Order Details

• Repeat each order to client because disputes arise from misunderstandings
• Clearly specify the security (e.g., Class A or B common, warrants, or rights) because public companies have many securities types
• Errors completing order tickets may cause losses when fixed
• Generally, the person making the error pays
• However, RRs are typically liable as supervisors for sales assistants' negligence
• Therefore, check the firm guide for policy

Important Assistants Information

• RRs using sales assistants must confirm their full training and understanding of firm systems
• Sales assistants to be both comfortable & knowledgeable in inputting orders
• Paper tickets are in decline as industry adopts fully digital systems
• One must still recognize all key aspects

Order Ticket Details

• Sample order client Bill Smith wants to buy 200 Alpha Beta Company (ABC) shares at market during the day
• His account number is pre assigned, the RR's identification number is next
• Some dealers lets first-time orders go in without the number being assigned
• Account application and first order must be signed off by Designated Supervisor
• Client and Rep numbers are needed to process ticket unless account number created
• Then account must be recorded

Types of Orders

• Order types are categorized by duration, price limits, special instructions, and if client is PRO
• If there are no additions, a basic order includes what comes under duration and price

Orders Categorized By Duration

• Duration of each order is listed in table 7.4
• A day order to buy or sell expires if unexecuted at the trading day's end
• Good till cancelled (GTC) order stays until executed/canceled
• TSX places a 90 day expiry for GTC orders
• Also called open orders
• Valid till filled/cancelled or set business date a Good Till Date(GTD) order is useful if customer will be absent or can't be reached

Examples of Order Durations

• "Buy 100 shares of XYZ for my account at $10 or less" which is only good that same day
• "Sell 100 shares of XYZ whenever the price reaches $20 or more" will stay open until XYZ hits price point
• "Sell 100 shares of XYZ if the price reaches $20 or more on or before March 30" is only good until that date

Orders Categorized By Price

• Orders are categorized by price, shown in Table 7.5
• Order to sell/buy via market prices called a market order
• No price limits required

Examples of Order Price

• "Buy 100 shares of XYZ Inc. at market" has no price limit
• "Buy 100 XYZ Inc. at $20 or less" orders will execute up to a price of $20
• In stock stays about that order will cancel

On-Stop Sell Order

• Often referred to as stop-loss, connects to sell order where limit is below market prices
• Order executes as prices drop to designated level
• For lowering potential losses and protecting paper investments with falling values

On-Stop Buy Order

• Buys stocks if the price is above certain amount
• Protects short positions if prices rise
• Secures stocks when prices increase
• Follows the short sellers' logic for using on-stop sell orders to secure stocks
• Can be client request after move demonstrating signal of buy

Examples of On Stop Orders

• "Sell my XYZ stock if the price drops to $20" will only trigger if markets fall to $20
• TSX and TXS-V needs all on-stop sell order to be capped so consult equity department
• "Buy 100 XYZ Inc. only if it moves up from $30 to $35" is a way wait then execute orders on XYX
• In order to protect a short position when the stocks prices rising

Orders Categorized By Special Instructions

• Automated system may/may not allow handled requests-check it out before trying
• Fast requests and guaranteed filled prices not guaranteed

All-or-none order

• Entire stock or no part executed at all
• All at best-effort prices
• May trade or at price, but limited by parameters

Fill-or-kill order

• All as possible immediately, or else the rest fails
• Regardless of amount
• If U.S. based, FOK filled wholly immediately failing all of order

Switch order

• Sells and then purchases the securities, one then the other
• May get partial fill and standard buy
• Common across investing

Examples

• "Buy 2,500 shares of XYZ at $20 on an all-or-none basis" is what it implies
• "Buy 2,500 XYZ at $20 on a fill-or-kill basis" with only 1500 filled, the rest fails
• "Sell 100 XYZ and use the proceeds from this sale to buy shares of CDE" is typical switch order

Continued Contingent Orders

• Requires second action to first
• Must execute first action before second takes effect
• Could be fixed price/ distance to primary completion

Delayed delivery order

• Buying/selling agree that items settled beyond the date
• In institutional deals
• Sales happen below market and can be delayed to fill

Short sale order

• Selling nonowned stock
• Borrowed and hoped to replace and give profits as valuations fall from the decline
• Can face loss, when prices instead increase, from having to cover at a high
• Dealers can force coverage before you are done
• Illicit to not label
• Must declare request

Examples of Contingent/Delayed/Short

• ""Buy 1,000 shares of XYZ at market and sell 10 calls at the current offer price" sets execution of calls to XYZ execution
• "On August 31, a client enters an order to sell 100 shares of ABC at $23 on a 30-day delayed delivery basis" is how orders take extra days
• Examples of short sales are "Sell short 100 XYZ at $20" with coverage yielding you profit or the same, but at increased prices with forced replacement

More On Type Orders

• Listed for other designations

Cancel-Change

• Cancels or alters other entered trade
• Systems may take, in altered fashions
• Alert clients to not use in fast markets

PRO

• Employee/client
• Must indicate status and place lower

Fixed Income Trading

• Takes place in OTC/phone market
• Includes debt securities

Examples of Other Types of Orders

• Employee orders are listed via marking, so other buyers are prioritized over then
• Trades of bonds happen typically via phone after looking through OTC postings with dealer/intermediaries

Standard Trading Units

• $250,000 par value for GOC T-bills and other GOC direct and guarantees maturing in less than one year
• $100,000 par value for GOC direct and guarantees with terms of one to three years
• $100,000 par value for GOC direct and guarantees with terms of over three years
• $25,000 par value for Provincial bonds and guarantees
• $25,000 par value for All other bonds (municipal and corporate)
• $5,000 par value irrespective of value of appendages for Bonds, convertible debentures, and debentures issued at a $5,000 par value with attached stock warrants, rights, or other appendages
• 500 shares if market price is below $1/share for Common and preferred stocks not listed on a recognized stock exchange
• 100 shares if market price is at $1 and below $100 for Common and preferred stocks not listed on a recognized stock exchange
• 50 shares if market is $100 or over for Common and preferred stocks not listed on a recognized stock exchange

Trading Debt Markets

• Follow specific requirements/principles like..Deal fairly, Provide fair Pricing and valuation, Comply with requirements, Maintain compliance, treasury auction requirements
• Retail Client Accounts: set clear markups/downs and evaluate that's pricing that is maintained

Sale and Trading Conduct

• Must carefully adhere to rules
• Required to recognize potential rule changes
• Need Know your Client and know our recommendations

Client Priority

• PRO/EMPLOYEE orders rank below a client at same dealer's orders
• Referred to client priority
• Doubts on client marker should come from consultant

Unreasonable Principal Orders

• Participant is barred from placing principal or non-client if they "may" front-run
• Same prices and side
• Can place in front from consent, never

Best Execution

• Found in IDPC CIRO's and based not just off price
• Best outcome to be assessed in case
• Achieves best price, however separate with better price order
• Diligently ensure on advantageous point and is quickly possibly at good prices for clients
• Members need policy and review and execution quality
• Prices/volumes/directions/size/liquidity

Gatekeeper

• No laws be broken
• Includes reps, and if colleagues break, be responsible
• Bad reps can be lost revenue, job over etc
• Look for danger, and report it to supervisors
• Check policies listed

Examples

• The RR was introduced to a CEO/RR who transacted at the son/nephews names because it was against CEO/RR rules
• Had CEO been attempting to manipulate their stock price, the RR is directly to blame, be duly diligent
• An RR trades pink sheets for account holder but knows they are director but lets all bad things be done anyway
• SRO broke good standing because didn't care

Further rules in section

• Make sure supervisor/ compliance gets every violation reviewed
• Do not engage unacceptable, deceptive, improper fraudulent activity
• No frontrunning
• Fair for client execution

Anti-Money Laundering (AML)

• Watch out for terror financing and laundering deals
• Suspicious action needs to go to FINTRAC, which must check for all actions
• If "seems like crimes" and are not acted upon can be taken action against
• Do not warn/tip anyone
• They could block any and all progress
• Willful blindness is also bad and all actors can be liable

Prohibited Activities

• Do not engage unethical practices
• Competent RRs must make appropriate payments
• Must reduce high pressure sales
• Never frontrun
• Make sure to stay ethical

Frontrunning

• No taking advantage with leading edge
• Knowingly having advance on big shares is a crime
• Cannot trade over rumour or private conversations
• This is against not just insiders but the one who give tips

When is it Not Illegal

• Customer, and participant, all agreed, clients/principal all crossed out or agreed
• "Can be, however, when the participant and the client have agreed on a client-principal cross"

Churning

• Actions and trading only for revenues can occur prosecution and canceling for RR
• Fair action is needed

Kyle The Fair

• Make sure RR never just trading for themselves

Comply Suggest

• Never at expense of the customer can be OK
• Trades all need account in mind to be valid

Overseas

• Filling in another group/state illegal if are not there
• Understandings between overseas folks can break restrictions

Non Qualified

• Unregistered items aren't OK unless cleared province act to do so
• File with prospectus for security sales

Illegal Statements

• Can't make misleading statements in area
• Also will be Criminal code to follow
• Can never make claims of guaranteed reselling funds or doubling in price
• Don't use RR images unless authorized

Rules

• Don't use pressure tactics and do understand client/product
• Violate the KYP requirements by offering to sell securities without fully understanding the product’s characteristics and risks.
• Can't sell by undisclosed
• Can't trade when not done
• Do not break statute ever

Manip

• Do not accept trading practices to not be transparent
• Do not try to lie to customers
• Do not create fake activity
• No scam
• No manipulation
• No fakery for transfer purposes
• Not siding against client
• Don't misled
• Do not try to help activity with volume
• Use rumour or say non truths when not there
• Colude and play poorly

Unsanctioned Discretionary

• Can't unless you let them

Illegal Side Action And Tip

• Can be not given access
• Then can’t get advantage out if
• Then make tips and that is illegal
• Only authorized can get
• Need to review practical

Firewalls

• Stop wrong activity

Areas To Safeguard

• Must educate
• Keep contained
• Transact few
• Surveilled it

Key Areas To Check

• No sharing
• Record things
• Follow code

Sedo

• Follow all laws of area
• Check legal document

Who And Why

• Insiders known to everyone
• They must understand event data

All Parties To Follow

• CBCA must file to transfer
• Always follow

Transfers

• Be sure that is accurate transfer

Know the Rules

• Marketplace needs regulation
• Off not necessarily needing those

Lacking Is Bad

• Can get them sued
• Securities not delivered by the cut off are called fails
• The dealer member expecting delivery of the security might demand delivery and, if the dealer member is unable to arrange delivery, may get bought in
• Closing out contracts or buy-in procedures begin in a bit

Conclusion and Next Step

• Be sure proper actions take care of customers
• Be sure all is good and ethical
• Have excellent future