Chapter 13 - v1.3

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Questions and Answers

What is a primary requirement under UMIR Rule 7.1 regarding trade desk compliance procedures?

Periodic review of proprietary and employee trades before large client transactions. (correct)

Monthly disclosure of all trade adjustments made by traders.

Review of all client orders daily.

Immediate execution of client orders to prevent market impact.

Which of the following statements best describes the concept of best execution according to the ATS Rules?

Best execution entails using professional judgment and considering various factors beyond price. (correct)

Best execution requires executing trades as quickly as possible, regardless of price.

Best execution is irrelevant if all market conditions are favorable.

Best execution is solely about achieving the highest possible price.

What client protection is implied under the best execution obligation?

Ensuring clients receive preferential treatment over market orders.

Protecting clients from predatory behavior by market participants. (correct)

Guaranteeing the lowest fees for trading.

Preventing client trades from being executed if prices are fluctuating.

When assessing the impact of a trade on the market, which scenario is likely to raise more scrutiny?

A PRO trader engaging in a small transaction in a thinly traded security relative to a client trade. Signup and view all the answers

Which element is not typically included in the considerations for determining best execution?

General relationships with market-making firms. Signup and view all the answers

How does the client priority rule affect trades by a PRO trader?

It requires PRO traders to disclose trade details when executing orders concurrently with clients. Signup and view all the answers

What characterizes a pre-arranged trade that could be considered a wash trade?

It creates a misleading appearance of trading. Signup and view all the answers

Which of the following scenarios would NOT typically be considered illegal insider trading?

An analyst provides a recommendation based on public information. Signup and view all the answers

What is a significant factor when determining if a trade has a legitimate basis?

Whether there is a prior agreement between the trading parties. Signup and view all the answers

What does the Criminal Code focus on regarding insider information?

The potential for information to affect market price. Signup and view all the answers

How is illegal insider trading typically defined?

The use of undisclosed information by a person with a special relationship to the issuer. Signup and view all the answers

What action might an auditor take concerning a trade made in error that is offset by another trade?

Consider it as trading with oneself, which is prohibited. Signup and view all the answers

Which party is MOST likely to be engaged in insider trading?

A lawyer who has knowledge of a pending merger. Signup and view all the answers

What is the primary concern with transactions that create a misleading appearance of trading?

They could mislead investors regarding price stability. Signup and view all the answers

Which of the following best describes 'tipping' in relation to insider trading?

Disclosing inside information to people outside the company. Signup and view all the answers

What potential issue arises from employees maintaining accounts at firms other than their own?

Difficulty in supervising trades accurately Signup and view all the answers

What is a common requirement for employee accounts designated as PRO accounts?

They generally cannot participate in distributions involving the dealer member. Signup and view all the answers

Which trading practice is a concern that could arise if employees have access to undisclosed material information?

Insider trading Signup and view all the answers

What is a necessary safeguard in the order entry and trading process?

Mandatory supervisor approval for all trades Signup and view all the answers

Why might dealer members require a pre-approval process for certain orders?

To ensure trades are in compliance with established thresholds Signup and view all the answers

How can electronic order entry systems impact order management?

They increase the need for effective management reporting. Signup and view all the answers

What trading issue is specifically linked to employees with significant trading debts?

Risk of neglecting client responsibilities Signup and view all the answers

Which of the following is a reason for establishing separate trading reports for PRO accounts?

To ensure thorough review and compliance at the head office Signup and view all the answers

What is a potential hazard associated with market manipulation concerning employee trading?

Misrepresentation of trade volumes Signup and view all the answers

What type of criteria can firms customize for order entry based on registrants?

Pre-approval criteria Signup and view all the answers

What is the primary purpose of the ATS Rules adopted by CSA in 2001?

To facilitate competition and improve market integrity Signup and view all the answers

Which of the following statements about order processing in securities is accurate?

Thinly traded equities are more likely to exhibit trading concerns. Signup and view all the answers

Which elements are included in the general securities regulatory standards applicable to dealer members?

UMIR standards are complementary and specific to listed Canadian equities. Signup and view all the answers

What does the term 'dark pools' refer to in the context of ATS operation?

Trading venues where orders are not displayed publicly. Signup and view all the answers

What requirement is imposed on marketplaces by the ATS Rules to ensure accessibility?

Access cannot be unreasonably prohibited or limited. Signup and view all the answers

Which of the following risks is associated specifically with small-cap, thinly traded equities?

They have a higher susceptibility to manipulation and fraud. Signup and view all the answers

What is a significant feature of the UMIR standards in relation to other trading regulations?

They augment general securities regulation by addressing specific trading behaviors. Signup and view all the answers

How do the ATS rules impact competition among marketplaces?

They aim to minimize fragmentation while encouraging transparency. Signup and view all the answers

Why might mutual funds and exchange-traded funds be less susceptible to secondary market trading concerns?

They have more complex valuation mechanisms that stabilize pricing. Signup and view all the answers

What is the primary concern of regulators when a trader satisfies a client order by trading with the firm's inventory?

It may lead to double trading of securities. Signup and view all the answers

Under what condition is trading with a client over multiple marketplaces not considered double printing?

If the trader successfully flattens the inventory risk. Signup and view all the answers

What does UMIR Rule 2.3 specifically prohibit?

Entry of orders that do not comply with securities legislation. Signup and view all the answers

Which of the following scenarios is an example of short selling?

An investor selling a security they do not own, expecting its price to fall. Signup and view all the answers

What is the rationale behind risk assessment in trades involving gifts or charitable donations?

There’s typically no transfer of economic ownership. Signup and view all the answers

What is the implication of accepting risk in trading with a client over multiple marketplaces?

It differentiates the trade from double printing. Signup and view all the answers

In the context of improper trading orders, which of the following is a key requirement of UMIR?

Knowledge of non-compliance with applicable regulations is crucial. Signup and view all the answers

Why might a trader use short selling as part of a hedging strategy?

To offset potential losses from another security position. Signup and view all the answers

What is a potential consequence of double printing according to trading regulations?

It results in unnecessary volume being traded. Signup and view all the answers

Which scenario would not be considered improper under UMIR according to the provided guidelines?

Accepting gifts of securities without economic transfer. Signup and view all the answers

Study Notes

Wash Trades

Wash trades are pre-arranged transactions designed to create a misleading appearance of trading activity.
They are considered securities regulatory violations, even if not intentionally deceptive.
A legitimate trade involves a buyer and seller with mutual agreement on the trade terms.

Prohibited Insider Trading

Insider information is non-public information that could significantly impact a security's market price.
Illegal insider trading involves using such information for trading purposes, directly or indirectly.
Persons with inside information include those who are shareholders or have business relationships with the issuer, participate in mergers or takeovers, and are employed by the issuer.
Tipping — sharing inside information for trading purposes — is also illegal.

Employee Account Controls

Dealer members are encouraged to prohibit employees from maintaining accounts at other firms to ensure effective supervision.
Employees may be subject to trading restrictions to prevent insider trading and ensure client priority, especially during capital market distributions or mergers and acquisitions.
PRO accounts are designated for employee trading and typically restricted from participating in distributions of securities the dealer member is involved in.
Requiring manager approval for employee trades helps ensure the integrity of the transactions.

Order Entry and Trading Controls

Order entry and trading controls are essential to address suitability, credit, potential errors, market manipulation, and insider trading.
Electronic systems have simplified order entry but necessitate effective management reporting for manual review.
Most order entries are electronic and require mandatory field completion.
Pre-approval criteria can be established for orders exceeding a certain threshold and customized for different registrants and trade types.

Multiple Marketplaces

The ATS Rules (NI 21-101 and NI 23-101) aim to facilitate competition and investor choice, enhance market integrity in a multi-marketplace environment, and minimize fragmentation caused by competition.
The rules provide a framework for ATSs (Alternative Trading Systems) to compete with exchanges, requiring fair access and transparency.
Dark pools, where orders are not publicly displayed, are permitted.
The ATS Rules prohibit manipulative and fraudulent activities and include provisions regarding best execution for dealers and advisers.

Double Printing

Double printing occurs when a trader satisfies a client order using the firm's inventory and then trades with the marketplace to flatten the inventory position.
Regulators view this practice as inefficient, as the order could have been fulfilled by market liquidity.
Double printing is not considered a violation if the trader flattens the position over multiple marketplaces, as it involves taking on some risk.

Improper Orders and Trades

UMIR Rule 2.3 prohibits orders or trades that violate securities legislation, self-regulatory organization rules, or marketplace requirements.
Short sales are sales of securities that the seller doesn't own, often used for speculative or hedging purposes.

Front-Running

UMIR Rule 7.1 and CIRO rules address front-running, where an employee uses knowledge of client orders to execute their own trades before the client order.
This practice is considered unethical and may violate client priority.
Assessing the potential impact of trades on the market is crucial to prevent front-running, especially when dealing with thinly traded securities.

Best Execution

Best execution refers to the firm's obligation to achieve the most advantageous execution terms for its clients, taking into account price and other relevant factors.
It involves achieving the best price, protecting clients from predatory behavior, and leveraging economies of scale.
While achieving the best price is important, best execution goes beyond price considerations, factoring in a multitude of circumstances.

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Description

Test your knowledge on securities regulations, including wash trades and insider trading. This quiz covers essential concepts regarding employee account controls and the implications of illegal trading activities. Perfect for finance students or professionals looking to brush up on compliance standards.