Securities Trading and Settlement

Trading, Settlement, and Prohibited Activities

• Mechanics of placing orders for securities, implications of order types, and sales and trading practices are all discussed
• Settlement and delivery, securities transfer, and error handling, are described

Key Terms

• All key terms are defined in the Glossary and appear in bold within the chapter

Introduction

• The correct, efficient placement of orders ensures client happiness and loyalty
• Correct order entries needs knowing order types, settlement & delivery, changing/correcting orders
• Registered Representatives (RRs) are gatekeepers who cannot facilitate breaches of law through acts or omissions
• RRs may be responsible for colleague breaches, with consequences like regulatory penalties, financial loss, reputation, and termination if not acting as gatekeepers

How Securities are Traded

• Need to understand three components of a trade- to understand how securities are traded:
  • The standard trading unit
  • The settlement period
  • The minimum quotation spread

Standard Trading Units

• The UMIR (Universal Market Integrity Rules) defines the quantity of a security making up a standard trading unit
• CIRO (Canadian Investment Regulatory Organization) specifies trading units for debt and unlisted securities
• Orders to buy or sell not in multiples of standard trading units are odd lots

TSX and TSX Venture Exchange Standard Trading Units

• Less than $0.10 per unit constitutes 1,000 units for standard trading unit, and a unit odd lot of 1 to 999 units
• $0.10 or more/unit, less than $1.00/unit means 500 units for standard trading unit, and a unit odd lot of 1 to 499 units
• At least $1.00 per unit means 100 units for standard trading unit, and a unit odd lot of 1 to 99 units

Example of Standard Trading Units

• 550 shares ordered for listed equity at $5.00/share means five standard trading units & an odd lot of 50 shares

Odd Lots

• The price obtained might not be as good as a standard trading unit due to difficulties filling odd lot orders
• Traders executing odd lot orders can discount payments for purchases and premium for sales
• Clients may get less for odd lots they sell and pay more for the odd lots they buy

Settlement Period

• Trade settlement refers to the cash for securities exchange between buyers and sellers of stocks, bonds, futures, or financial assets
• The settlement period is the time between a securities transaction and the ownership transfer date
• Lengths vary by security type. Most securities settle one business day after the trade date

Settle Periods

• As of 2024, North American Capital Markets shortened standard settlement to next day (T+1) for most securities trades from two days after (T+2)

Regular Settlement Periods

• GOC Treasury Bills (T-bills) settles same day (T+0)
• Bonds and preferred/common shares settle in 1 business day (T+1)

Minimum Quotation Spreads

• Clients selling at market receive the bid price
• Clients buying at market pay the ask price or offer price
• Minimum acceptable range between bid and ask prices determined by exchanges is the minimum quotation spread

TSX and TSX V Minimum Quotation Spreads

• Security selling for under $0.50 has a quotation spread of $0.005
• Security selling for $0.50+ has a quotation spread of $0.01

Quotation Spread Example

• For a one cent minimum quotation spread stock, bid & ask prices must be at least one cent apart; $2.34 (bid) and $2.35 (ask)

Placing and Order

• Computerized trading systems affect order placements which have become more varied
• RRs ensure compliance with procedures and industry rules for order submitting - order correctness, client presentation accuracy for non-discretionary accounts
• Purchases and sales needs an order ticket, enforced by authorities, exchanges, and CIRO

Order Ticket Details

• The client's name or the account number (or both)
• The quantity and description of the security (most often shown by a symbol)
• A notation as to the price (e.g. limit, market, or on-stop)
• Notation as to whether the order is professional (PRO), non-client (N-C), or employee (EMP)
• Notation as to short sale or discretionary order

Errors

• Errors can be expensive, needs clarity/accuracy when filling order forms
• Proper errors caused by misunderstanding/poorly written instructions can be prevented by:
  • Clearly entering information
  • Repeating order back to client
  • Looking up the proper stock symbol or writing name of security
  • Considering BUY/SELL order
  • Correct form usage
  • Verifying security description

Repeating Order

• Repeating each order to client is important, client/registrant disputes commonly result from simple misunderstanding about an order aspect
• Clearly specify security being traded and what kind (Class A or B common, second preferred, warrants, or rights)

Completing Order Tickets

• Resulting trading losses from errors made in completing tickets are charged to person making the error
• If an RR's sales assistant makes an error due to negligence, the RR is responsible
• Important to confirm firm policies and procedures

Sales Assistance

• RRs using a Sales asisstant must make sure fully trained
• Sales assistants must understand firm order entry system

Sample Order Ticket

• Paper tickets are being phased out in computerized trading industry, yet important to understand basics

Types of Orders

• Orders are categorized generally by duration and price restrictions, any special instructions, or change to original order including clients that are PRO
• There should be some basic elements in the order

Orders Categorized by Duration

• Categories include day order, good-till-cancelled (GTC), and good-till-date (GTD)
• Day order: This buy or sell order, if not executed, expires at the trading day's end
  • Buy 100 shares of XYZ for my account at $10 or less.
  • No time limit is specified so the order is valid until the close of business or until filled whichever is sooner.
• GTC an open order, to buy or sell, that remains valid
  • Stays active until filled/canceled. On TSX, GTC order expires 90 days after entry
  • "Sell 100 shares of XYZ whenever the price reaches $20 or more”.
  • The order stays open until the price of XYZ reaches $20+ or time to be filled
• GTD orders are valid until filled/canceled, or expiry date's business day's close - Used for clients that are unreachable, are on vacation, or trip -"Sell 100 shares of XYZ when at $20+ on or before March 30.” Order is open until filled at $20+ or close March 30.

Orders Categorized by Price

• The categories include; Market Order, Limit order, on-stop sell order, and on-stop buy order
• A Market order is to buy/sell at the prevailing market price
• "Buy 100 shares of XYZ Inc. at market”.
• No price limit means order fills at real-time bid or ask price
• A limit order sets to buy/sell at specified price
• "Buy 100 XYZ Inc. at $20/less" is only filled if it can be executed at $20 or less.
• On-stop sell, (stop-loss order) is to connect sell order, the stock falls to level. Stops stock declines.
• "Sell my XYZ stock in price drops to $20”.
• On the TSX, all on-stop sells must be entered with limit attached. The moment the on-stop gets triggered, it gets put at limit. Consult for aid with department
• The buy order goes to buy the above/at price.
• "Buy 100 XYZ Incl. only if moves to $30 to $35.
• A buy of $35 means trader must buy stock “or better,” and prevails market
• Consult department on such

Orders Categorized by Special Instructions

• Members might accept order, see local procedures of form
• Orders get done on a best-efforts basis.

All-Or-None

• (Good) side must get all stocks to be sold
• "Buy 2,500 shares of XYZ @$20/ all-or-none”
• The side won't get total orders even if some shares at 1,200, but won't be done if 2,500 isn't found

Fill-Or-Kill(FOK)

Is instant fill must be done to the max, and left over gets canned.

• "Buy 2,500 XYZ at $20 fill-OTB”
• Only 1,500 sold, rest of shares canned

Switch

This is a sales to buy sequential order.

• This is common for MFs. Should client get partial fill. -"Sell 100 XXX use to proceeds the CD.”
  • CD, at $18/share, client got enough to get 111 shares from stock. Clarify the best option fill.

Conringent order

Takes a 2nd place in orders, where a lead needs to get fulfilled to trigger this next segment

• "Buy 1K share at market, and sell 10 calls for offer price""

Delayed Delivery Order

• Buying or selling parties settles delivery beyond period
• Usually done by institutional customers
• Sell order enters at discount from price cause Buyer agrees -"Aug, on Aug-31 on ABC for $23 delivered with delay for 30 days.” If there is an order one the 31st, settle on day 30 (2nd month)

Short sale order

When the client doesn't have stocks.

• Dealer loans, sells shorts expecting a downturn. The down-turn helps one save. Can risk if price up and buyer will have to replace.
  • (Always DECLARE your sort order on order)
• "sell Short on 100 ABC on $2”

CANCEL-or-Change Former Order

Has Amendments/cancels to prev orders.

• Automating, gets RRs to check and get it from a system Check with parties trying to trade to see any market changes

Professional order, employee client:

Used only by those parties. Must clearly marked-Client deals must get priority

• sell 100 shares of 120 Order must be PRO.

Income Trading, FIXED

Bonds are OTC deals. These trading platform execute over the line Table 7. Standard Units and Securities

Specific guides rule for dealing with that

• Fairly deal with your clients. Provide fair valuations

Sales and Trading Conduct

• Must study the rules for province and require the compliance. As an, RR is that you are responsible on info while follow them; Knowing KYKYP is essential.

Client Priority

PROs, officers, and employers are always behind client, for order with the same time. Known the client priority rule. Ensure the non-clients get identifiers If doubted or get to compliance

Rule by, 5.3, cannot get entry in orders, that are likely going behind order with priority. Subject to said exception

Withhold entry. Client is illiquid

UMIR and Policy exceptions

Adding client other client orders

Summarized

• Following are the cases. Best action is about rules

Best Execution

Takes client and execution set by ClRO.

• No direct route for deals. Aspects are not only price. So members can fulfill their mandate of executing in the client action. Best practices should get looked at. Members must note all of the following items:
• Price. Speed, certainty. Costs

Also relates to process time

• prices and volumes, market position, the size, and liquidity position.

Gatekeepers

Registered or IR. To oversee law changes, they don't work well, if at all. These red flags mean facts, breaches of laws. Ask to see policy or compliance Case examples An RR is to use his client and that CEO to put his family into an oil stock investment. Not getting authorization is against diligence An HR has friend. That friend used U.S. sheets and securities to get 4 trades for that, however those aren't appropriate. Failing leads to action against them

Prohibited Activities

Competent honest. Rule is to stop unethical/dishonest things

FRONT-RUNNING

Trading early, being serious, yet rumors is normal. -Trading in info and in Co. is trading (prohibited). The knowledge, order cannot enter the spot

By HR and Knowledge trading must get info in advance to do that

• Market trade and is liable in 5.

HR is refrain if client knows order to be in. Get involved in Principal or other order

• Solicit the security, or
• Get the necessary info for another

Cannot always trade early, if agreed, is a 1. Client principal course of action

Churning

• Is trading a lot only to increase. May be in good faith Case is new HR at INC. Who has less knowledge, this is to see his supervisor, and there excessive.

Ensure To Comply

-Commissioning is calling earnings, thus is not legal

• Must keep well informed on all Action should question action

Jurisdiction, Sales Made Outside Of A

• Not approved, leads to the broad issue definition. Action to cancel

Sale Of Securities, unqualified

Cannot trade, as certain, acts to see. Always be approved by someone

Trading To Trade, Illegal

• Is to ensure penalties or other things occurred

Note On The list, the Prohibited

Always illegal too. Using tactics from pressure in order to get investment

Is The Following Practices That Violate Rules

• Using high pressure tactics that pressure the clients that not miss a profitable investment (hidden costs and risk) Takes Advantage of, and mislead, those in issues
• Dealert, and misleading things. Not Understanding Characteristics
• Reducing or retracting commission
  • By Analysts without them disclosing information Violating terms

Trading Practices, Manipulated

Not okay to deceive or claim a sale, be it for securities, etc Not okay creating a misleading trading action. Also, in an arranged arrangement. Be a high quote. Also to a high degree and manipulative

• To see fraud, check a record by those. Spreading rumors By colluding, to unfairly gain from the company. Acting on something special, that will affect market price

For the advantage of trading

That makes things, that are not right

Unauthorized Discretionary Trading

-RRs cannot make orders under discretion, with specifics Rules give the permission to accept this

Tipping and Insider Trade, Illegal

Info known, that are not public, giving advantage. Tipping passes that knowledge to someone, such that the person can benefit. The is against law

Who Is Inner (Those)?

• Directors and senior, that are key to the business
• Anyone that are not owners and control voting
• Officers in sub-office's

Are Not Inside Information (The What)

Insider is a non known information. Material is either occurrence. Meaning could affect action

Now on prohibition

All must get the order, must be those with a reason Those that deal with officers

What To Do For Rules Against Tipping

Penalties that, lead to compensation

Firewalls

Firewalls protect those with key info from those that will effect business Follows 4 actions: Education, containment, restricting actions, watching stuff

To Protect The Information (Contained)

Secure Areas and Systems, Discussing The Issues, When and Why May get stopped, to cut trade,

Securities (Settlements, Transfers, and Corrections)

-Trade settlement, security transfer, handling correction

Now See Trading Mechanics and Practices

Settling and Transfer

Clean, Systems

Service clears and works a with bank This has cash sent among the trades during day, or stock sent at that deal

There are security to take up during a sell and transfer trade

Then there are obligations and responsibility of the buyer

The Seller Accrued Interest To

• Bond's seller has interest to date and to the payment made which effects purchaser's trade on interest, since next check has to be paid buy the purchaser.

Rights and ex dividends

Must close at end/holiday at what effects that day before

Trad Cash

Usually settle day prior. Then set cash can speed date. Determine the right cash

On Stock, Rights

Follow the exchanges

Rules on how order are

Value can affect Buy the order

Security, Transfer

Get the form, hand to the authority, and to see a control. It falls on 4 categories, simple v legal documents

Sim Transfers

The person must endorse his or her form accurately. And see if the person is okay

Documentation, Transfer With

What documents to get

Changes In The Owner

If someone tries to be a, sub contract then that is wrong If not then its ok May do to get a RRSP

On Marketplace (How Deals Done)

Not to do fraud at any time

Done marketplace mean they

Trade via agents or OTC

Securities Failure to Deliver, Listed

What is not delivered is a failure is called, delivery needs to happen may look to be borrowed by them

Can't buy

Be bought, and will put a premium. To then follow procedures, okay. Premium on that

Payments And Delivery

• RR that ensure's customer instructions
• Considerations are that the Client is dealing on, the side are limited by financial resources-You must make sure to sell and pay
• And ask, the

Err Trades

Are often costly to most, due to market effects. There are processes of to

There are 2 types of errors

Before is with CFO.

After is:

1. Account or commission, fix it.
2. Anything else, ask. There will never be one that settles

Examples, Errors

• It will get sold, the trade may be sold at less with the right

Overview of the Chapter

The mechanics of orders that is set and RRs to do work on to be right, that should keep on clients right side.

So as RR, what to be, you got to stay and take the right action, because in all you need to keep correct records